The current gold bull market that has been going on for well over 10 years has never entered a mania bubble phase, especially when you compare it to pervious bubbles of the past. If we compare today’s gold price rise to that of the 1970s gold bull market, or the 1990s tech bubble and the 2000s oil run, we can clearly see that this gold bull market has underperformed on a percentage basis. The three other bubbles took about nine years to go from the start of the bubble before it hit the mania exponential rise in the last 2 years. It seems like starting in year 7 after a small correction, the bubble making process starts to go exponential and can clearly gain several hundred percent in the final phase.

The current bull market for gold has risen steadily for about 9 years, but on a percentage basis we still haven’t seen the exponential rise in a 1 to 2 year period that would clearly mark it as a bubble mania phase. In fact, after making solid gains and rising for 9 years, the gold market has essentially gone sideways over the last eighteen months. The good thing is that in the previous bubbles, after it burst the asset class had given back several hundred percent in the 1-2 years following the peak. Luckily we haven’t seen that in this bull run for gold, not yet anyways, but we could see the cycle bottom later this year. The recent correction has given back about 20% from the peak of just over $1900 to just below $1550.

Can the correction continue and steepen to the downside? Sure, anything is possible, especially in a market that can easily be manipulated. But looking at the charts below, gold never went into a mania exponential rise and has been consolidating sideways for 18 months. This gold bull market run is definitely not like previous bubbles and the further this correction at these prices goes out in time, the more likely we will still see one more mania phase push higher with a several hundred percent rise before we can state that gold is truly in a bubble.

Graph courtesy of Macrotrends.org - This chart tracks the performance of gold since July of 2002 against the three largest bubbles of the last 40 years. Past bubbles have shown strong but steady growth for the first 7-8 years before moving into a hyper-growth phase for the last 18-24 months. Each series is adjusted for inflation and is smoothed with a 3-month moving average. 

Dow vs. Gold Over the Last 100 Years and in the Current Bull Market

When we look at the Dow to Gold ratio for the last 100 years we see that the Dow has traded between less than 5 times the price of gold on several different occasions. Most of this time was between 1915 and 1940s, with the exception of the roaring 20s when the stock markets outperformed gold significantly. The only other time we saw gold become over valued compared to the Dow was during the 60s and 70s, this was the last time when gold was in a bull market and it lasted less than 20 years. From the early 1980s to about 2000, the Dow has clearly outperformed gold going from one extreme to another. In fact, at the peak of the Dow to gold ratio in 1999, you could buy the Dow 45 times over gold, but ever since then gold has been outperforming the Dow up until recently. What we haven’t seen during this bull market for gold is a Dow to Gold ratio below 5 which could easily mark gold as way over valued compared to the Dow. In order for gold to be considered in a bubble territory, history has shown us that we need the ratio to be clearly below 5 to 1 on a spike low.

Graph courtesy of Macrotrends.org

Now let’s take a look at the recent chart for Dow to Gold over the last 12 years shown below. Starting in 1999, the Dow was priced 45 times gold and since then has given up a significant portion of that ratio. In 2011, the ratio did go as low as 5.7 to 1 when the gold price peaked at about $1900 and ever since then the Dow has been advancing while gold has still been correcting. Today the Dow to Gold ratio is about 9 to 1 and the Dow just made all time highs at 14,286 while gold is sitting at about $1580.

While the ratio is working in favour of the Dow for the moment, it would clearly need to break above 10 to 1 on a strong advance before we can say that gold is in trouble and that the bull market may be over. The 10 to 1 Dow to Gold ratio can be considered the line in the sand; this is where a period of great consolidation will take place before any judgement can be made. Assuming gold stays at about $1600, the Dow can easily move to all time new highs and towards 16,000, it will probably do so by May. At that time, the Dow will most likely take a pause and possibly start a correction going into the summer.

The only question is what will gold do once we reach the 10 to 1. Does it enter a strong bear market and retreat further compared to the Dow as it goes on to make all time highs from Fed enduced printing? Or does the bull market in gold reassert itself and the Dow starts a correction as we move back towards a 5 to 1 ratio. Looking at the chart above, the Dow to Gold ratio is still in favour of gold but has started to move sideways. Maybe a new trading range of 5 to 1 and 10 to 1 between the Dow and Gold still holds for the remainder of the decade. If that is the case, we are much closer to the Dow being at a top and gold at a bottom if the 10 to 1 ratio holds.  At some point in the next decade we could see this ratio dip below 5 to 1 which would mean a strong rise in gold compared to the Dow at it enters bubble territory, but we are clearly not there yet.

One thing the charts above clearly show are that gold has never entered a strong parabolic rise into bubble territory. If that was the case, we would have seen a strong percentage gain of several hundred percent in gold within a very short period of time, of which it would be all given back in the same amount of time. Also, looking at the 100 year Dow to Gold ratio chart, the ratio never went below 5 to one which would mark that gold was way over valued compared to the Dow on a historical basis.

The Gold Miners Have Under Performed Everything

As for the gold miners, the XAU is a much broader index used to measure the performance of 30 mining companies. A chart courtesy of James Turk from Gold Money shows how the miners have done compared to gold since 1988. As we can clearly see, gold has outperformed the Dow and the miners during the current Bull Run we have been in. Following the melt down that started in 08, the miners have seriously underperformed and have gone on to historical lows compared to gold. During the 90s when there was technically no bull market in gold and you could buy the mining companies in the XAU index between 6 to 10 grams of gold. The range between 6 to 8 grams of gold for the XAU held between 2001 and 2008 when the bull market started. Since 2008, the miners have seriously underperformed versus gold and you can now buy the index for less than 3 grams of gold. The miners are extremely cheap compared to gold; in fact they probably have never been this cheap throughout history.

If you enjoyed reading this article and are interested in protecting your wealth with precious metals, you can receive our free blog by visiting TDV Golden Trader.

Cheers,

We could be at transition period in this bull market where the paper gold price dictatorship comes into question and the democratic free market physical price will start ruling the golden kingdom. The dictatorship by Western central planners over the gold price is ready to be challenged and we may come to a point in history where only votes based on actual physical holdings will be counted. There will be no hanging chads counted on this financial election ballet, its either you own the gold legally and outright, or you have paper promises for imaginary gold (similar to government bond and fiat money) where the question around ownership will arise. Trust us; you don’t want to be one holding paper receipts in questionable gold backed investments engineered by most western financial institutions. Ask yourself, can you trust the source of gold dictatorship to protect your financial assets, especially when it comes to your gold holdings?

HUI and the Gold Miners

When it comes to owning the gold miners, we actually believe we hit the bottom of the market this past summer and then most recently this December. Back in the summer we suggested adding to positions and selling into a September rally for trading positions and then look to add back position in the November/December time frame.

Looking at the HUI chart below, it seems this past December low finished off the correction that started in October. If this does turn out to be the lows, then I see some really positive signs in the charts. Since the beginning of December, the RSI, and MACD have been turning up after being in negative territory and they both look like they have room and momentum on their side to move higher. This means the HUI has a good chance at starting an intermediate uptrend which should last at least a month to two and go towards an initial target of 475 before taking a pause.

What is most encouraging is seeing HUI start to make a new trend upward from May 2012 in a series of higher highs and higher lows, this is a positive development especially if the December lows of 425 hold. What would be more encouraging would be to see the HUI start a new uptrend right now, go to 475 and then blow past it to test the resistance seen at 525 in September. If the gold miners do catch a strong bid and can get past the 525 hurdle that is in front of us, then we can be confident that we really do have a strong rally in the miners and that the uptrend will continue to make higher highs and higher lows moving forward. Eventually it may blow past the old highs of 625 which may come sometime towards the end of this year, but most likely in early 2014.

If you plan on trading these markets, pay attention to the above mentioned numbers on the HUI for places to lighten up on positions and then buy back in on any pull backs in a series of higher highs and higher lows. If we are right on this pattern and uptrend, then the next wave up should take out the September high of 525 and more likely run to 575 (hopefully by spring) before we see a significant correction going into the summer doldrums maybe back towards the 450-475 level. Then I suspect we could see a strong yearend rally that goes well into the early part of 2014 and at that time I expect the HUI to be back close to all time highs. This is what I see happening technically on the charts and hopefully the fundamentals will allow this to play out over the coming year and a half; of course this is based on normal market activity and no market manipulations. This is the strategy we have been planning for TDV Golden Trader subscriber and how to play this new uptrend that could be emerging over the next year.

If you enjoyed reading this article and are interested in protecting your wealth with precious metals, you can receive our free blog by visiting TDV Golden Trader. Also learn how you can purchase and protect your gold holdings by getting a copy of our special report Getting Your Gold out of Dodge or protecting the stock investments you currently own with Bullet Proof Shares.

Cheers,

There is some speculation that China is increasing its gold holding to make the yuan a gold-backed currency in an effort to make it a world currency reserve. While it is an interesting concept, it will most likely never happen. In order to back a currency, their gold holdings must increase or decrease alongside the increase or decrease in the number of currency units in the system. A gold backed currency would entail having a fixed rate of convertibility for each ounce of gold to a specific number currency units issued by that country. There is probably no country in the world that will honour convertibility on a fixed basis, it would be financial suicide and is part of the reason why Nixon closed the gold window. Also having a gold backed currency would mean the country would be continually increasing gold purchases to match the inflation of currency units issued. Tracking the amount of gold that is backing currency would also be next to impossible since there is a complete lack of transparency around the amount of currency units being issued by central banks and the amount of gold held by them. Currently currencies can be converted to gold on a floating basis at market price, but going to a gold backed currency would likely never happen.

China is making its currency more readily available for trade, thus bypassing the US dollar and making its currency the payment of choice for its export. Currently the yuan is fixed to the US dollar, but over time it will most likely have to adopt a floating currency like the rest of the world. Until then, expect China to continue adding to its gold reserve in an effort to make the yuan a competing currency for international trade. The US will lose its reserve currency status over time (most likely some time this decade) but it most likely will never go away completely and the yuan will not take over completely. We will most likely just have bi-lateral trade agreements with several national currencies being used for payments. The yuan is just the new kid on the block but there is still the Euro, British pound, Japanese yen, the US$ and probably the IMFs SDR that will also be used. Even the Canadian dollar has been strengthening lately, as the IMF said it’s considering classifying the Canuck buck and the Australian dollar as reserves currencies.

While gold may not be convertible at a fixed rate any time soon, VTB Group is Russia’s first lender to sell perpetual bonds and debt linked to the country’s benchmark equity index and is now selling the nation’s debut notes tied to the price of gold (see Bloomberg article). VTB is offering 1 billion rubles ($32 million) of securities that will be redeemed in December 2013 that will pay a rate on returns based on the gold price up to a limit of 20 percent. Being a pioneer in the Russian market, VTB is the 2^nd largest bank and will provide pension funds an alternative to invest in gold without the limits placed on commodity holding by regulators. The article even talks about how even Western financial institutions such as JP Morgan, Barclays, and Credit Suisse are issuing notes tied to gold this month. This is just another example of how gold is becoming an important financial asset. The need to diversify and protect wealth becomes more apparent in an era of currency wars which will destroy the value of fiat money. Financial institutions realize that central banks will continue down the path of printing money, inflation and currency devaluation, there is no other choice. They see the writing on the wall and are now capitalizing on a new markets by providing financial assets tied to the price of gold price.

All these currencies will continue to inflate and I doubt the bankers will allow gold to become a competing currency for everyday transactions. However its role as a store of value will continue to appreciate as long as fiat money continues to exits. So we should be happy that government and central bankers will continue to use and expand fiat currency, it makes their currency worth less and gold will continue to benefit in the long run.

What we are seeing now, with short term fluctuations in the price of gold is just market noise and short term trading opportunities created by the gold market high frequency traders and bullion banks. This will come to pass as the price of gold gets smoothed out and then slowly advances higher with a two steps forward one step back dance along a rising trend. All this talk about gold by mainstream media is just market noise to try and explain very short term movements in price. They have very little understanding of gold and the role it will play in the future as a store of value. Being the good slaves and puppets for the central bankers, MSM is only good at misdirecting the public and they are paid very well for doing so. Once gold finishes this consolidation, the price should continue to advance to all time highs in 2013 and 2014 with a possibility of doubling from the current price to reach a minimum target of $3500 in the next few years.

If you enjoyed reading this article and are interested in protecting your wealth with precious metals, you can receive our free blog by visiting TDV Golden Trader. Also learn how you can purchase and protect your gold holdings by getting a copy of our special report Getting Your Gold out of Dodge or protecting the stock investments you currently own with Bullet Proof Shares.

Regards,

Looking at the gold chart below, we can see that gold has been correcting over the last two weeks. When applying some technical analysis to the gold chart, we can clearly see that there would have been overhead resistance at $1800 since most of the year gold has traded between $1550 and $1800. A few weeks ago, we also noticed a big build in the short position on the Comex’s Commitment of Traders report COT by the commercial and bullion banks. The effort to stop gold’s advance at a key resistance level was successful in part because of the huge increase in the short position at that level, which is why we knew to take some profits and that would be an ideal place for a correction to start.

Now that the correction has started and gold is giving back some of its gains from the summer, the question now remains: How much of a retracement will we see on the price of gold? While the shorts are currently in control of driving the price down, support will come from other central banks and buyers of physical gold.

With gold at $1701, it is currently (noon on Tuesday Oct. 24) sitting below the 50 dma at $1720 which is above the 200 dma at $1662. The first line of support for this coming week was at $1720 and if it holds above the 50 dma the correction in gold could be over. If we continue to see weakness in gold over the next week or two, we can expect the correction will continue later this month and going into elections. This is something I suspect could happen if the overall markets continue to remain week.

Looking at the chart we suspect that buying will come in at the new support price range at about $1650 (+ or - $20) if the 50 dma at $1720 doesn’t hold this coming week. One thing to note is that the 50 dma crossed above the 200 dma around the end of September, which is an over good sign. However it needs to remain above the 200 dma for this advance higher in gold to hold before it can go on to make new highs. We remain optimistic that gold will either bounce here at the 50 dma of $1720 or at a retest of the 200 dma of $1662, which would still be bullish over all. If you are looking to add to your physical gold holdings and diversifying them internationally, scaling in now and at the $1650 price range would be a good place to start adding to current or new positions. Keep in mind that the support at the 200 dma may not hold, which means the price of gold can retrace right back to longer term support at $1550 which has been in place all year. However, I give it a small probability that we will correct back to that price range as we are entering a seasonally strong part of the gold cycle in November and December.

While I hate making predictions on what the gold price will do short term, I suspect it could consolidate between $1650 - $1750 for the remainder of the year. While we are entering a stronger part of the gold season and the fundamentals are lined up to suggest higher prices, we have conflicting events such as a huge concentrated short position, the US elections, the US fiscal cliff and tax loss selling to deal with for the remainder of the year. With 2 strong opposing forces acting on one another, the price of the metal may consolidate around $1650 - $1750 for some time until either the bulls or bears clearly take this market in one direction or another. Until then, all we can do is sit around and wait for a clear break outside the trading range that has been established over the last year.

HUI Gold Miners Index Analysis

Just like gold, the HUI index is also correcting since September. Earlier last month, we thought index would trade to 520 before meeting resistance, which we can clearly see it has done and it is now in the process of correcting. It would not be unusual for the index to give back up to 50% of its recent gains from the summer lows. Back in July, it looks like a low of 385 was made on the index and a recent high of 525 was achieved back in September; this is a 140 point gain. So if the market was to give back 50% of this gain or 70 points, we can expect the HUI to retrace back to about 455, which would be the next best time to add to positions.

Currently the HUI is at 495 which is still above the 50 dma at 482 and the 200 dma at 465, which is a positive alignment if the index can hold these gains. One thing to pay attention to from the chart below is the price action on the HUI from April this past year to the end of August, a period called the summer doldrums. During this period support came around 385 and was tested 2 different times, while overhead resistance was at 450 which also was tested a couple of times. Back then 450 was overhead resistance which was finally broken with a strong move higher during September; we suspect this will now become the new support level while 520 will act as resistance.

While we still remain cautiously optimistic that a new uptrend has started longer term, the HUI will most likely correct back to the 460 range ( + or – 10 points) over the coming months and 520 will now act as overhead resistance as a new trading range will be set. In general, support around 465 (the 200 dma) is where we would look to initiate new positions in some of the senior producers and hold them going into the New Year. At some point, I do expect overhead resistance at 520 will be breached to the upside at which point the HUI index could run to 580 and higher, but that would mean gold would have to be on fire and trading above its overhead resistance at $1800 on a holding basis. Until then, the miners will probably trade in a range where the HUI fluctuates between 460 and 520 as long as gold stays above $1650.

US Dollar Analysis

While the US dollar is looking good at the moment and getting a nice little bounce higher lately, this could be very short lived. The up channel that has been in place from August 2011 to August 2012 has been clearly broken and now it has started a new down trend channel this past August.

All we are seeing is a current bounce from oversold levels on the RSI and MACD and it already seem to be stalling out. The US dollar could move slightly higher to test the 50dma of 80.38 or the top of the new down channel at 81, but the rally should stop there. One thing to note is that the 50 dma just crossed below the 200 dma in the last few days, that is not a good sign. Once this relief rally is over, the dollar should continue downward and possibly to the bottom end of this downward channel. This could mean a definitive move below recent support around 78 on the index, if this happens and support is broken, it could lead to a cascading move downwards towards 75 or possibly 73.75 as the next major support level. If the dollar does break down, gold and silver will shoot much higher.

The best hope for the US dollar is for it to sit in a channel between 78 and 81.50 which is where I think it could trade sideways for some time until we clear the elections and get some direction on fiscal policy from the Fed.  If the dollar goes sideways, G and S will also trade in a sideways channel. More than likely we will get some clear direction once the election are done.

If you enjoyed reading this article and are interested in protecting your wealth with precious metals, you can receive our free blog by visiting TDV Golden Trader.   Also learn how you can purchase and protect your gold holdings by getting a copy of our special report Getting Your Gold out of Dodge or protecting the stock investments you currently own with Bullet Proof Shares.

Here is an exerpt from the TDV Golden Trader newsletter sent out to subscribers on July 23, 2012: 

I suspect alot of that money will come into the commodities market and especially into the mining sector. There are many great projects which show great preliminary economic studies with today's current prices of commodities. Banks can provide the funds necessary to help put projects into production by way of corporate bonds or loans with higher interest rates. Even with a 7-10 % rate, many of these projects are very economical, provide a positive IRR and have short payback period (3-5 years). Potential producers should really look at this option for funding their projects, the interest rates are reasonable and this would eliminate the need for further dilution.

It is also in the bankers’ best interest in making these loans to the various development projects for many reasons. First, they will be making a much higher positive yield over the next 3-5 years than most other fixed income investments. They can probably become first in line as a creditor guaranteeing their investment and using the company assets and reserves to help determine valuations as possible collateral. Also, their funds are probably safer at a cash flow positive producing mine versus buying bonds of a pig country that can only make interest payment by robbing Peter to pay Paul. In their need to make secure investments, banks can also guarantee their payments will not be interrupted by keeping a floor under the commodities prices. This floor price can be achieved by forcing the producer to hedge part of their production at current prices, thus guaranteeing a predictable minimum future cash flow. 

Lately we have seen more debt offerings, issuance of debentures and credit being given to mining companies who can prove strong economics on new projects or expansion to current mining operations. Here are few examples from the last few months: 

Stornoway Diamond Corp. (TSX:SWY) has entered into a mandate letter with seven financial institutions concerning debt financing for the company’s Renard diamond project in northern Quebec. The mandated lead arrangers are Bank of Montreal, Caterpillar Financial, Export Development Canada, Investissement Quebec, Nedbank Capital Limited (London Branch), Societe Generale (Canada Branch) and The Bank of Nova Scotia which will arrange senior loans of up to $475 million, the company says.

Lake Shore Gold Corp. ("Lake Shore Gold" or the "Company") (TSX:LSG)(NYSE MKT:LSG)  announced today that the Company has completed the previously announced public offering (the "Offering"), on a "bought deal" basis, of C$90 million principal amount of 6.25% convertible senior unsecured debentures (the "Debentures") maturing on September 30, 2017.

Kirkland Lake Gold Announces $50 Million Private Placement of Convertible Debentures - The Debentures will mature on June 30, 2017 (the "Maturity Date"), unless earlier redeemed, and will bear interest, accruing, calculated and payable semi-annually in arrears on June 30 and December 31 of each year, at a rate of 6.0%. 

While the quality juniors have been able to raise capital in the last year, most are still finding it difficult to raise funds. In the past, small producers and exploration companies relied on the capital markets to raise funds by way of private placement and issuing shares which have been highly dilutive and overall negative for investors in these companies. We have a feeling that many juniors will be able to raise capital in this market, but they will have to be creative in their approach to getting funding deals done without diluting shareholders.

Private Sector Enters the Gold Mining Industry

However, the nature and investing climate for the mining sector has changed recently. We are now seeing investment funding and credit becoming available to mining companies from the private sector. Cluff Gold (TSX:CFG) a West Africa focused gold mining company recently announced a strategic alliance with Samsung C&T Corporation where Samsung will provide an unhedged US$20M facility to Cluff Gold in a Memorandum of Understanding (MOU). The MOU also provides a framework for the potential long term funding of Cluff’s Baomahun project and other development opportunities.

In my opinion, Samsung, being a visionary in the electronics industry, has realized it needs to make strategic investments with its cash in order to protect purchasing power and secure availability of gold and silver to be used in its products. This is a game changer and as fiat paper currencies get destroyed by the central banks and governments, the smart money will continue to gravitate towards gold, the true store of wealth. This could be the start of a new trend where private sector corporations start paying attention to gold as currency and hedge against paper assets. I would expect this trend to continue as more private companies and fund manager will find a need to diversify out of paper money and into the currency of last resort: gold. While it may be difficult for these companies and institution to buy the physical metal on the open market, the smart money will go right to the source and get invested where profits can be maximised, which means going to the miners.

We are in next phase of this bull market in precious metals, and gold and silver will continue to move higher now that printing money to infinity has become official policy. It will be the miners who are still undervalued and have growth potential that will really benefit from this next round of QE and rising gold prices. Expect to hear more stories about investments coming to the mining sector and as this trend grows, so will the attention being paid to the minors. While the ETFs may be a good way to trade the price of metals rising, the leverage and exponential gains will be made with selecting the right mining company. The next leg of this bull market will benefit the miners and they could easily outperform the gold price over the next few years, this is where we see the real gains to be made.

I will be speaking at the Cambridge House Toronto Resource Investment Conference on September 27 and 28, 2012. You may register here to attend the show. I will be presenting a 30 minute workshop on Friday the 28th at 4:00 pm on "Trading Opportunities: Looking for Catalysts and Developing Strategies to Trade Precious Metals Shares". On Thursday morning I will also be a panel speaker alongside Bill Murphy, Chris Powell, and Jay Taylor discussing gold’s diminishing supply and increasing demand.

If you enjoyed reading this article and are interested in protecting your wealth with precious metals, you can receive our free blog by visiting TDV Golden Trader.

This past week was a major catalyst for the precious metals, as they closed the week up strongly based on strong fundamentals for the sector. We have been anticipating the next catalyst for the PM sector to start making a strong advance, and we got it with a coordinated effort from central banks around the world. They will print whatever is necessary to fight off deflation and another financial collapse. Here are a few headlines we saw from the media lately:

"Gold Prices Gain on German Ruling", "ECB to launch 'outright monetary transaction' plan", and "IMF's Lagarde backs ECB-bond buying plan"

This afternoon, the FOMC meeting concluded and was followed by a press conference by Ben Bernanke. The precious metals market has been on a strong uptrend over the last month in anticipation of additional bond buying and stimulus (AKA Quantitative Easing).  Over the last month, the fed has hinted that they will stimulate if needed but never actually pulled the trigger. Precious metals still rose in anticipation of coming QE.  Well, he finally did it and the metal prices are up on this news, below is some commentary on what the fed announced. See Reuters article about this QE.

This looks to be stimulus like the original QE 1 and 2 and this is super bullish for gold, like it was back in 2009 and 2010.  This starts off another major uptrend for gold and it will be going to $3500 over the next few years.  Now is the time to be getting invested again, it's almost an all in moment on any pullback and then its onwards and upwards from here.  We can expect this QE to last indefinitely just like we can expect a low interest rate environment for an extended period of time.  It's QE to infinity and gold will definitely shine. 

ECB Bond Buying Program

With headlines like these, the world markets are proven to be irrational in their approach to dealing with debts; the central banks around the world will print and by up bonds as needed. The West may have saved themselves for the moment, but this really opens up the door for moral hazard and the mindset that debts don’t matter has been rationalized around the world. The Western central planners rationalize their action by stating the bond buying program will be sterilized. The hazard is that other central bankers around the world will also engage in sterilized bond buying and supporting of governments, all of which is backed by nothing except faith. They claim the bond buying is sterilized because the central banks print money to buy bonds of the governments to keep yields low and then make up new bonds to sell to other central banks and all of this financial alchemy is based on buying and selling of foreign currency bonds. To learn more about currency intervention and how the bonds could be sterilized, you can read about it here.

They claim the net effect is there is no increase in the monetary base, but any rational human can see this is pure manipulation and gaming the system. With no new monetary base, the money supply in the system does not increase and it is very similar to Operation Twist. The net effect of the new bond buying program is there will be no direct stimulus to the economy and the governments will continue to be supported by the central banks. The new bonds issued by the government will carry lower interest rates, which will then be supposedly paid back to the CBs over an extended period of time. The old government debt will be rolled over and extended from this bond buying program and only small amounts of additional interest will be paid on these new bonds, which tax payers will eventually have to pay one way or another. The governments will then have to accommodate the additional interest payments on the new debt which could eat into budgets, so they will either tax more or reduce some of their spending. The paper currency Ponzi scheme will be allowed to continue and coup d’état over the financial system has been accomplished by the central bankers. The idea is that bad loans and debts do not matter anymore in an attempt to keep the system afloat, eventually that will fail and precious metals will prosper as a result.

With keeping interest rates low, bonds have virtually no upside from here since interest rates can't go much lower from here.  Savers will be forced to speculate in order to create yield and precious metals will benefit over the next few years from a negative yield interest rate environment.  Business with tons of cash on the sidelines will be forced put that money to work in search of economic returns and banks with tons of cheap cash on hand will be loaning out more money to qualified people and businesses. Deflation and collapse is no longer an option, the system will be supported and soon the market will be talking about expansion and growth again. Money will be put to work even though the western economies may stagnate over the next decade. The market will soon look beyond the Euro and US mess and move forward in search of yield.  It may continue looking at emerging markets for growth and opportunities, but it definitely look to precious metals for safety from the depreciation of paper currencies.

Once we start seeing this money turning over in the system, the velocity of money will increase significantly which will then lead to higher inflation, this is when we can expect gold to really shine.  While the upside for bonds will be limited in a low interest rate environment, the upside for gold is unlimited from endless printing of fiat currencies and bonds by all central bankers and governments around the world.  The upside for the price of bonds is limited to interest rates going to zero and they can be printed to infinity.  The amount of gold available in the world is fixed to current inventory plus expected additional supply.  Because supply is limited, gold's price could go to infinity to equally match the unlimited printing of bonds and currency units which are used to purchase them. So in the end, bond prices are limited on the upside while supply is infinite, while gold supply is limited and it's price is limitless in a world based on fiat currencies—which would you rather own?

Gold Update

In the last 2 weeks, gold has made a great break out move above $1620 and then $1660-$1680. The price is now holding strong above $1720 as central bankers are planning on bond buying programs and additional stimulus in a coordinated effort to avoid a deflationary spiral. This opens up the door to QE to infinity, they will print since there is no other option and precious metals will benefit from this. Gold and silver are going much higher in the years to come, but it won’t be in a straight line. Expect volatile moves to the upside and swift corrections, but the general trend for the next few years is towards higher prices. Keep with the trend and buy the dips and sell into major strength if you plan on trading the paper markets. If you purchased the physical metals during this past summer, you may want to consider holding on to them, we may not see these prices again, ever.

The RSI is rising and starting to move above 80, which could be getting into overbought territory, however the MACD is in a slow steady trend higher over the last couple of months. Look for new support to be around $1680 (which would be a good opportunity to add to positions) and short term overhead resistance to be at $1780-1800 (sell trading positions currently open) which has been overhead resistance back in November and February, at which time we could see a significant correction. If the gold market clears $1800 and holds on a closing weekly basis, we could retest the previous highs and go on to make new highs .

The HUI Gold Miners Index

The HUI clearly broke the downtrend line by gapping up above it late last week. The RSI is still rising and so is the MACD. If gold makes a move to $1800, expect the HUI to rise towards 500 before taking a break and correction. This would be a great time to sell open trading position in the next few weeks, especially after any news from the Fed about stimulus and QE. The fact that gold and the HUI has risen so much in the last month based on expectations for QE and the indicators are getting close to  overbought territory.  We may see an initial jump in price for the HUI index after any announcement, then a minor correction as much of this news could be priced into the metals and the miners.  Watch the reaction of the metals and the HUI later this week and next, but if the advance higher starts stalling out, you may want to consider closing trading positions and book some profits.

More than likely towards the end of this month/early next month, we could start to see a minor correction going into October and November as election approach, the market may take a breather. We may also see some strong year end selling this year, especially coming from the US as their tax laws on capital gains are scheduled to change next year. It would be a good time to start new positions or add to current holdings during that correction.  We can expect the trend to continue higher as the metals go on to make higher highs and higher lows over the next 6 to 9 months.

If you enjoyed reading this article and are interested in protecting your wealth with precious metals, you can receive our free blog by visiting TDV Golden Trader.

Financial Fraud in the Gold Market

When it comes to opportunity for fraud, the East is not innocent either.  Last month, police in Central China rounded up 33 people suspected of illegal gold-futures trading.  The case involved 5,000 investors and at least 380 billion Yuan ($59.62 billion) in which the suspects claimed to be agents of overseas companies dealing in London gold with the promise of huge returns.  They promoted investments in Loco London gold and charged exorbitant consulting fees without warning investors of the risks of these transactions or having a signed detailed contract.  This had been going on since October 2008 in a low key operation using private bank accounts, mobile phones and online messaging services.  Several suspects were caught and detained since March 2, 2012 while more arrests are expected to be made across China as the investigation continues.

As observers of the precious metals market, we know that many Eastern central banks are accumulating physical gold.  It is in their best interest to accumulate the physical metal and diversify out of toxic Western paper assets that were sold to them by the western financial puppet masters.   It is obvious that Western cartels like Goldman Sacs and JP Morgan are great at creating and selling financial instruments of mass destruction.

One only has to look at the CDO market or the mortgage backed securities sold in the past decade.  These paper products were backed by mortgages from over inflated real estate bought by people who could not afford to buy property and were thus set up to fail.  Another example is the derivative market which is reportedly over $600T worth of contracts used for “hedging” all the toilet paper assets sold by Western institutions.  This includes derivatives and “insurance” products to protect from default or significant changes in valuation on assets such as government bonds, interest rates & credit default swaps and most other paper assets.  There is no way these contracts are backed by any real asset and when they are called to perform, the system will collapse.  This is most likely why they changed the name and structure of the recent Greek default on bonds; they cannot afford to trigger the derivative time bomb.

Any observer of the financial markets can see that the derivative market is just an insurance scam being sold as a hedging tool for paper products.  They cannot and will not every pay out on derivates because the cascading effect would bring down the system.  Yet the paper pushers are still selling these “contract assurances” in volumes in order to create a “financial hedge” of the entire system.    When push comes to shove, planners may not let Goldman or JPM collapse because they are TOO connected to fail and they are the ringleaders in pushing paper products for the world to buy in their pump and dump scams.

Masters of Alchemy – Turning Paper in to GOLD

This past week, it was reported that George Soros was unloading investments in major financial stocks and started investing back in gold by way of GLD.  We always question the choice of investment vehicles used by large fund managers.  As a investor in the gold sector, why wouldn’t anyone stick with the physical metal vs. an ETF such as GLD which is supposedly backed by gold?  There have been lots of questions around GLD and its physical holdings, which was primarily sold by JP Morgan, one of the many bullion banks with a questionable short position in the precious metals market (Silver in particular).  If the past decade is any indication of paper manipulation (and they are known to have a track record for selling paper products which turn out to be fraudulent), why would anyone buy an ETF like GLD from these Masters of Financial Alchemy when they have the proven ability to turn paper into gold?

When looking at GLD and the many other “un-backed” gold trading vehicles being sold into the market, these products are very questionable on how much gold they have held on storage or available for delivery.  Even if there was significant amounts of gold, with the lack of good auditing practices, who knows how much is really owned by the fund.  Much of it could be used as collateral, hypothecated, leased out or swapped in contracts by the issuers of these products.  When called to perform and deliver the gold, expect questions of ownership and scandals much like MF Global or PFGBest.  This is the nature of products created by the Wall Street paper pushers; everything should be questioned eventually.  But for now and most of this bull market, GLD will not be questioned or audited.  It will be used as another tool for selling an ETF in a particular asset class, one that will become more and more in demand as the bull market for gold evolves.  This ETF will be used by the likes of all major trading houses, funds, sovereigns and investors because it is a trading vehicle and a proxy for gold, and it could be used for hedging purposes much like the derivative market.

Going back to why Soros would invents in such a fund:  Our suspicion is that Soros is reducing exposure in financials because they have structural problems and have many questions surrounding the assets they hold.  While a $50M withdrawal is not much for a fund his size, a purchase of $130M in GLD is significant.  His strategy is probably to take these funds and go long on GLD as a hedging tool for the exposure he still has remaining in financials.  Soros is just being smart and realizing that he must hedge using gold, even if it has to be with GLD.  He knows the paper pushers need GDL as a tool for hedging, so do not expect it to collapse anytime soon.   This means more than likely that the “Masters of Financial Alchemy” such as JPM Morgan and Goldman Sacs will continue to sell paper with promises of gold backing and it will get accepted by the market as “Good as Gold”. We at TDV, however, know better. 

At this point, it is a very wise move for anyone who doesn’t have any exposure to gold to start getting exposure immediately.  If you have not taken this necessary step to protect your assets and hedge against any potential financial storm that may be brewing, you are placing yourself and any remaining assets at risk.  Owning the physical is always suggested as a private investor, but if need be look at GLD as a trading and hedging vehicle. 

In a strange and ironic way, we need GLD to continue its paper scams as it still legitimizes gold as an investible asset class.  The more GLD grows and continues to gain attention, the stronger and longer this bull market will last in precious metal.   As much as we realize that GLD could be a scam and owning the physical is the prudent thing to do, we cannot discount the need for GLD as a tool for hedging.  There is no way the physical market for gold can absorb demand coming from central banks, pension funds, sovereigns and the general investing public all at the same time.  It would make gold reach sky high prices in very short order which would not be healthy for a strong and long gold bull market.  Unfortunately, we need GLD and more gold ETFs around the world.  There is way too much fiat paper floating around and much more coming, the physical market couldn’t absorb this amount of funny money coming into the physical sector.  As much as I hate to say this, GLD is a necessary evil for the longevity of this bull market.   There is many more reason why we need more gold backed ETFs and products such as GLD mentioned above, however using this ETF as a hedging tool is a very important one.

In the near future we will look at additional reasons for owning gold through the various ETFs as a tool for trading and hedging.  We will also explore the various options available for owning paper or physical gold in the numerous ETFs around the world.  This information will be made available on our blog to everyone interested in evaluating gold specific ETFs. If you enjoyed reading this article and are interested in protecting your wealth with precious metals, you can receive our free blog by visiting TDV Golden Trader.

As for Canada's banks, Carney said they may have some exposure to record household debt levels and the overheated housing market, but he noted that high-risk mortgages are insured by the federal government.

The Canadian real estate housing bubble still seems to get inflated in some major cities like Toronto. 

I recently heard a story of someone who bought a house pre-construction for $701K about 18 months ago. The house is now selling for $850K by the builder.  Let’s say the buyer put down 25% or about $180K.  Their $180K investment in the house provided a $149K return, or 82.78% profit on paper already in less than a year and a half.  Annualized, this is a 55.19% return on the initial investment thanks to buying pre-construction, which is something you still don’t get in the regular real estate market by trying to buy and flip already built homes.

But even the homes that are already built and occupied are keeping up with real inflation.  It still seems the average house is rising by 5% a year.  Let’s say you own a modest $400k starter house in the suburbs, and have 25% down, or $100K.  The house value is going up 5% a year or $20K/year on a $400K home, this would mean your equity portion of $100K is now worth $120K after one year and on paper, you just made 20% ROI on your house.  The cost to carry a $300K mortgage at a 4% interest rate is about $12k if you’re paying just on a straight home equity line of credit (interest only).  Even if you add $3000 for taxes, the cost of living in that house is only $15k a year. Yet your investment appreciates by $20K.  So essentially, putting $100K down to buy a house, the Canadian market is paying you on paper $5K net (which is almost the same as the inflation rate) to live in a house for free.

Under this scenario, your initial investment in the house earns you the same rate as inflation, so your purchasing power of that investment remains constant.  But because the value of the house is rising by 5%, the house price at $400k is rising by $20K a year of which $5k or 25% can be attributed to your investment ($100K down payment) and $15k or 75% is the bank’s mortgage. However, the banks portion of $15K appreciation does not go to them directly. It’s attributed to the market value of your house “on paper” and you are just making payments to them by way of $12K/year interest payments.  So you pay the bank’s interest payments of $12K/year on real money you must first earn from hard labour and in return the inflation of the housing price pays you $20K a year on paper.  Under this system, the paper inflation of the housing bubble is allowing a homeowner to live for free in that house and still make about 5% on your initial investment.  What a great system we have in Canada, where the ongoing housing bubble is allowing the homeowner to live for free and pays him a return on his initial investment, which keeps up with inflation!

This scenario is a win-win for all parties involved.  The homeowner lives for free (on paper) and earns a 5% return on their initial investment.  The banks get paid 4% a year by issuing a mortgage almost out of thin air under fractional reserve and fiat banking.  The government earns property taxes, income taxes, VAT and whatever other tax scams they create to steal wealth from the citizens. The only person who doesn’t win under this scenario is a person who doesn’t have enough down to pay for the deposit of an inflated house.  But then there is a cure for that too. 

The Canadian gov’t also has a program for insuring mortgages for people who can’t put enough down for a house.  It’s called the Canada Mortgage and Housing Corporation (CMHC), similar to Freddy and Fanny down in the United States. So we don’t have to worry about these people not being able to afford a house.  Their high-risk mortgages are insured by the federal government, which means the Canadian taxpayers are on the hook if the housing bubble ever burst (see Mark Carney’s statements above).  Of course, Mark Carney is totally encouraging this privatization of benefits and socialization of costs.  He is guaranteeing this boom will continue by leaving interest rates low in order to keep interest payments low on Canada's growing debt and help the export economy by preventing a stronger Canadian dollar. 

Good Intentions Create Bad Behaviours

While the concept of owning a house sounds good, especially given the housing inflation scenario above, is it really sustainable?  The record debt levels by Canadians are on average just as high as all other western nations.  The average salary or wage earnings are not rising and in a world of global competition the westerns salaries should continue to deteriorate with economic slowdown.

The artificial affordability of houses despite inflated prices makes it more difficult to enter the real estate market as a first time home buyer.  Why?  Everyone is now a real estate investor because it keeps rising in certain markets, thus pushing the prices higher and fuelling the boom.  Given the scenario above, why not become a real estate investor?  On paper, you get paid to own a house and the prices keep rising as more and more investors continue to bid up real estate.  The average Canadian real estate investor now owns multiple properties which were acquired with very little down and they’ve made out a like bandits while prices keep rising. And then there’s the fact they can collect rent from people who can’t afford to buy inflated houses.

The real estate agents are also making out like bandits in the Canadian real estate boom.  Many of them were buyers in preconstruction deals, so they bought really cheap and saved on the real estate commission.  They also cashed in from the buying and selling real estate for clients and lately their job has never been easier. They simply list the homes on the MLS and collect commissions with very little effort on their part since the houses and condos literally sell themselves in a real estate boom.  The agents on average are making 5-6% helping investors buy and sell houses as an investment, so their motive to keep the boom going is clear. 

With rising and elevated home prices, their incomes continue to rise as long as the boom continues.  With the advent of technology such as the internet and MLS, their job is even easier.  An average $500K home yields $25K in commissions at a 5% rate, which is split between the buying and selling agent.  This is a great payday for simply listing a house on the MLS, then doing a one day showing and waiting for a willing and eager buyer to show up (which is not difficult in boom times).  Then do some simple paperwork to close the deal.  Being a real estate lawyer surely doesn’t pay off like that, however.  Real estate lawyers only make about $1500 for either involvement in the transaction. They are definitely in the wrong field.

All this goes back to a question we have been asking for years.

How Long Can The Real Estate Boom In Canada Last?

The real estate boom will last as long as we have the same environment that created and maintains this boom lasts. We still have low interest rates, a stable and strong economy and buyers believing that real estate prices will continue to rise. This real estate boom in Canada has gone on much longer than we would have thought, but here we are and the prices are still trending higher.  The boom will last until there is triggering event that will turn it into a bust.  All booms and busts are usually created by a triggering event which is mostly a result of central bank actions such as the increase or decrease of the money supply or interest rate manipulation.

The housing boom in the US came after the tech bust and a drop in interest rates and a loosening of lending policies.  The US real estate bust came with the subprime scandal.  The US bankers’ fraud in bundling mortgages came to light and blew up in their faces.  Who paid for that bust?  Everyone in the world paid for it with the financial meltdown we saw in 2008. Since then most real estate markets around the world have gone bust.  In fact I can’t think of many countries around the world that haven’t had a decent correction in real estate.  Most have corrected or are in the process of correcting.  Yet certain markets in Canada seems to defy economic gravity. These Canadian real estate markets haven’t gotten sucked down like the rest of the world.

Why?  Because no one is willing to prick this bubble.  After all it’s a win-win for everyone.  The investor wins with appreciation on their investment and gets to live for free.  The banks win with continued interest revenues.  Government win with continuous tax revenues.  The central bank looks like a hero for maintaining a stable banking system and everyone working in the industry wins with continuous record incomes and commission.  Why would anyone want such a wonderful party to end?

While there have been some recent efforts to contain the bubble, such as higher deposit requirements and shortening of the amortization period of mortgages, that doesn’t seem to be enough of a deterrent to cool down the real estate bubble.  For the most part, having the low interest rate policy still makes being a real estate investor a profitable endeavor, especially if the properties can continue to provide cash flow.  The investor in real estate still wins because he makes good cash flow from a renter who cannot afford to buy at these prices and so must pay rent, which goes to paying off the investor’s mortgage.  If a first time homeowner is able to scrape up the 10% deposit and get the CMHC, he will most likely buy even at these inflated prices because he has very little choice... either he is paying inflated rental prices or inflated home prices.  His income has not risen significantly, but he is still forced to pony up a higher percentage of his income just to live in Canada because of the inflated real estate prices.

This turns out be a vicious cycle that benefits only the investor/owners/bankers/government and everyone else who is involved in gaming the system with ever increasing real estate prices.   As a result of this inflationary real estate policy the percentage of income that goes toward rent or homeownership keeps rising for new entrants to the market.  If you purchased a home a while ago, you are fine.  But good luck to a young couple or a new immigrant who is looking to be a first time home buyer.  They have been priced out of the market by everyone that has an interest in keeping the real estate inflation game alive and well.  Frankly, they should have gotten into the real estate racket earlier on in the cycle.

Canada’s Ponzi Real Estate Market

Like most bubbles or ponzi schemes, the real estate bubble will continue as long as new entrants/buyers are willing to buy from the people who got in earlier.  When it comes to investing, asset prices will continue to rise as long as there are new entrants to the market and the belief holds that the asset class will continue to reward everyone involved.  Real Estate is probably the most heavily invested asset class there is in Canada so everyone involved would love to see the status quo maintained.  As long as you are involved in the ponzi scheme and it continues to pay you, you have no motivation in wanting to see it collapse. 

For someone who is new to the RE market as an investor, my suggestion is to look at other markets or countries which have already corrected.  You will find much more value than in Canada’s over inflated RE market.  The ponzi scheme here still continues and you don’t want to be the investor stuck at the bottom of the pyramid with an over inflated investment hoping to sell it to some other sucker later on down the road.  What happens if that sucker wises up and realizes he is being played for a fool in a market that continues to get inflated because it’s rigged to benefit only the people already involved?

The other real estate ponzi schemes around the world have already busted, but Canada’s real estate market continues to inflate because no one is willing to burst it.  When it comes to a world of ponzi investing with fiat paper, you want to be at the top of the next great ponzi scheme.  You want to be rent/income collector and not the payer.  It’s tough entering today’s RE market in Canada as in investor.  You would be at the bottom of the ponzi pyramid, so your chances of success get limited.  In fact there is a lot of evidence that the ponzi real estate market in Canada is already popping.  It seems like a few pockets of RE such as Vancouver and in Alberta are already cooling off, more so because they got way more over inflated than the average real estate market during the commodities boom and influx of money from China.  Yet many areas in southern Ontario and especially GTA Toronto are still seeing price rises similar to the scenario mentioned above. Still, these markets are probably closer to busting than continuing down this ponzi path.

In a world where central banks create booms and busts, you are better off finding another ponzi scheme they are creating and get in early.  The real estate market in Canada may continue to rise, but in our opinion you are already too late to this party and more than likely it is ready to burst.   If you are heavily invested in real estate, you may want to take profits while they are still available or create a hedge.

The central banks and governments around the world have created another massive bubble in the government bond market which continues to grow.  This will most likely be the next bubble that will pop in the next few years.  Once it starts bursting, easy profits will be made shorting the bond market, something we will keep readers aware of when the time looks right.  Once this bond market starts to burst, we expect the gold market will start rising significantly.  While many media outlets claim that gold is in a bubble, it has not even come close to bubble territory.  The average investor hasn’t even considered gold as an investible asset class. He doesn’t own any and probably hasn’t even considered owning any.  This will all change and everyone will rush into gold over the coming years once the government debt bubble bursts.  While one bubble bursts (bonds), money rushes into another asset class and the only bubble that hasn’t been fully inflated is precious metals.

If you enjoyed reading this article and are interested in protecting your wealth with precious metals, you can receive our free blog by visiting TDV Golden Trader.

Cheers,

It is our firm belief that the precious metals sector has bottomed out and the downside is very limited from here on out.  While there doesn’t seem to be an immediate rush back into the sector, now is a great time to be acquiring physical metals, but more importantly producers with growth profiles. That’s where we really see the value and upside potential.  Now would be a good time to start adding and scaling into any new positions you plan on taking.

If we would have to make a speculative/educated guess/evaluation, by looking at the charts and fundamentals for precious metals and the miners, we believe that the worst is over.  We are fairly certain that we have seen the bottom over this past summer and building a good position in the physical, ETFs, and select miners right now is looking very promising.

Support has pretty much held throughout the summer and it’s looking good going into the fall.  While we still may see one more down wave, it would be more of a fake breakdown below support just to scare the remaining weak hands.  If that happens, I would think backing up the truck is a good idea, and start getting aggressive in adding exposure to the sector.  Buying at support around $1570 is a good place to start adding to positions.  Over the next few weeks we expect gold to trade around $1600 (+ or - $30) in a sideways trading range.

The HUI is still lagging gold, but a solid base under 400 has been building and it looks like a good time to add at support around 390.  If you look at the chart below, it started a major correction back at the beginning of March (when we suggested selling) and made a bottom in the middle of May.  Since then the index has traded sideways between 390 and 460.  A particular item to note on the chart is a 3 fan formation that seems to be developing since March.  If the summer lows and support holds at 390, then a re-test of 420 and the 50 dma should come soon, this happens to be the top of 2nd fan line.  If it crosses above the 2nd fan line and holds above the 50 dma, it could trigger a move to 460 and overhead resistance, with a possible move to the 200 dma at 485.  This is something we will watch for and take one day at a time.

Juicing Profits with Covered Calls on the Senior Producers

If you are interested in options strategies for a flat market, you may want to consider writing calls against the shares you currently own or if you plan on take a position in the senior producers over the next few weeks.   This is great way to squeeze some extra money out of the market by writing covered calls while still maintaining a position in your favourite seniors.

If you own or are buying shares in major producers (which is a good idea as long as PM stay flat), make some extra money by selling call options slightly higher than market price (up to 20% higher is a good price) with a covered call option strategy.  This way you get to own the stock, collect dividends if the producer pays them and then collect the premiums by selling the calls.  If the stock breaks above the call strike price, you have the shares to deliver, and can still buy back your position at spot or wait for a slight pull back.

If you are unfamiliar with the covered call strategy, you can learn more about it by a simple google search or by visiting the Investopedia site discussing covered calls, below is a brief description from their site.

Definition of 'Covered Call'

An options strategy whereby an investor holds a long position in an asset and writes (sells) call options on that same asset in an attempt to generate increased income from the asset. This is often employed when an investor has a short-term neutral view on the asset and for this reason hold the asset long and simultaneously have a short position via the option to generate income from the option premium.

Summary of Strategy

Our subscribers have been provided some good ideas for buying several senior producers.  There are many small to mid size producers which we also like and a few great exploration plays that are also on our radar.  Over the next few weeks, we will provide some additional companies which also merit owning a position in.  While it may not be feasible to buy shares in all these companies, you should create a basket of producers and exploration companies in your own portfolio.  At the moment, all the producers have great value (even if you bought at today’s prices) and most will do very well in the next few years.  You could literally throw a dart and pick anyone of the majors and they will all raise in share price once gold starts rising.  Our goal is to help find the ones that have greater upside potential and organic growth.

If you are familiar with options trading, you should consider buying some call options in many of the majors.  If you are very knowledgeable about options, consider the covered call strategy we just suggested with several of the majors that don’t have a great growth profile in the next year.  With a covered call, you want the stock to sit sideways while you collect the premiums for selling the calls.  If you don’t understand covered calls, we suggest you stay away from them or ask before you initiate this strategy.

For the moment, we suggest slowly picking away at the junior and explorers as they are usually the last to rise in price in a normal cyclical move higher in precious metals.  Could this time be any different?  Absolutely, they have become so cheap that many are trading for cash value and very little value is given to proven reserves.  This could change at any time and this is something we will watch for when all boats start rising with the coming tide into gold and the miners.  We feel that tide is coming soon and you want to be positioned to ride the wave once it does arrive, and looking out on the horizon all we can say is: SURF’S UP.

If you enjoyed reading this article and are interested in protecting your wealth with precious metals, you can receive our free blog by visiting TDV Golden Trader.

Cheers, 

July 25, 2012 should go down in history as the date the Federal Reserve may become fully accountable to the US government. A motion to pass the bill as amended was unanimously approved by the house to require a full audit of the boards of governors of the Federal Reserve System and banks. This will be done by the Comptroller General of the US before the end of 2012 and they are required to issue their report within 12 months of enactment.  The votes in the House in the bill’s passing this was 326 yea votes to 99 nay votes with 7 non votes.  Interestingly enough it was the Republicans that strongly supported this bill with 239 yea and 1 nay vote, while the Democrats voted 88 yea and 98 nay.  

There are many hurdles ahead of this bill before it takes effect; it still has to be ratified by the Senate and the President.  However, finally getting approved in the House is a step in the right direction.  Even if it does pass how much effect will the audit have in reality?  Probably not much since the banking institution known as the Federal Reserve operates outside of any law.  Even if they are found guilty of any wrong doing in managing the value of the US dollar or being involved in rigging the Libor rate, who will be there to prosecute them?  Remember they operate outside the law, so even if they are found guilty, it will be the US citizens and holders of paper/digital US dollars that will somehow pay for it. 

In a world where bank’s losses are socialized, the Federal Reserve (the banker for banks) misconducts have always been socialized on the people.  Of course, this socialization of losses by the Fed has been taking place ever since its illegal inception.  In 1913, the Federal Reserve stole the power to issue and control money by introducing the Federal Reserve note, something we call the US dollar.  Since then, it is estimated that the dollar has lost 95% of its purchasing power by way of inflation (the increase of the money supply), so it really has only 5% left to go.   As the value of the US dollar moves towards its intrinsic value of zero, gold and silver as true money has only one way to go and that is up.

Usually first reactions are correct and looking at this news the value of the US dollar reacted negatively, while gold went higher in most major currencies around the world. 

Could This be the Catalyst that Gold Needs for a Major Break Out to the Upside?  

In a manipulated market, it’s tough to say, but the fact that there is support for auditing the Fed and making it accountable is definitely a step in the right direction.  With the recent news about major banks manipulating the Libor rate, any investigation into the Fed’s involvement is most welcome and has to be gold-positive.  Recently, we have been writing about how gold is moving towards the financial system with several different proposals for making it a tier 1 asset class and its use as collateral by financial institutions. If these proposals take effect, they are planned for January 2013, which coincides nicely with this audit being completed by the end of 2012. 

Normally, the summer doldrums represent the lows in price for precious metals with a significant rally occurring in the fall and winter.  With this recent down turn, we have most likely seen the lows, and there are many catalysts for G&S to move higher into next years.

For example:

1. Food inflation is rising with this drought.

2. Gold could carry a zero risk weighting on bank books by Jan 2013 (BIS and FDIC are proposing this).

3. Paper currencies are Fiat, essentially worthless, but they will be used to create inflation, there is no other choice at the moment—QE to Infinity.

4. Market manipulation by bullion banks will be overrun by physical buyer (mostly now coming from central banks).

5. The investment community is only 1% invested in gold; historically this has been 5-10%.

6. Political tensions with Iran could heat up again later this year or early next, causing higher oil prices and as such gold.

7. More banking manipulation and scandals are emerging this summer, the Libor scandal is just the tip of the iceberg.

8. They system for true price discovery is broken, regulators have failed and the LBMA & Comex have lost all control and credibility.

9.  The price suppression by the west will be overrun by the East and physical buyers. The West cannot win this paper game.

10. MOST importantly: GOLD and SILVER is a hard asset and it has a history of over 5000 years being REAL MONEY. This paper/digital money has been only in place over the last 100 years and is doomed to fail.

Now is the time to be investing in gold and silver, during this consolidation.  A long period of consolidation is usually followed by a major move either to the upside and downside.  Given gold and silver’s favourable fundamentals, the break out will most likely be to the upside as gold moves towards the financial system.  Today’s positive price action could be the start of a new trend higher going into the fall and early next year.  If this trend plays out, there will be several opportunities to trade in and out of several precious metals ETFs.  The gold miners are great value compared to gold and we have been evaluating several that have great upside potential and production growth. 

The key is to be ahead of the curve before it happens, take a position and place a tight stop loss in case this is a fake break out and gold continues to correct lower against its fundamentals.  If the correction in gold is over and we are at a start of a new trend higher over the next year, this summer will prove to one of the best buying opportunities we have seen in a very long time.  Significant profits could be made buying gold and many of the producers during the summer doldrums and then selling into the fall and winter, the only question is are you positioned to take advantage of a trend change in gold when it happens.

If you enjoyed reading this article and are interested in protecting your wealth with precious metals, you can receive our free blog by visiting TDV Golden Trader. 

Cheers