Back Toward Support

2009-AUG-10

Markets never move in a straight line. There are always some retracements in every uptrend and every downtrend.

So it is not surprising that gold and silver began this week with some 'backing & filling' to build support, given how well they have done since their July 8th low. In terms of US dollars, gold and silver have risen 4.0% and 11.7% respectively, which is enough reason for them to take a rest.

Another reason is the Federal Open Market Committee meeting scheduled for this week. A rising gold price during that meeting would make clear the hollow rhetoric coming from policymakers that inflation is not a problem, and no one at the Fed wants to be embarrassed like that. So enter the gold cartel.

Comex open interest and the short positions of so-called commercials has expanded by huge amounts over the last few weeks while the metals have advanced, which is just one indication of the gold cartel's activity. They keep selling paper promises to deliver gold in the hope that their selling eventually caps the gold price and sends it lower, giving the gold cartel the opportunity to profit by covering their short sales. As Bill Murphy, proprietor of LeMetropoleCafe.com recently put it: "When it comes to analyzing the rigged gold price, in the end, all that has mattered these past many years is whether the physical gold market can overpower the gold cartel's ability to hold down the price, regardless of price levels themselves."

In other words, the gold cartel can sell all the paper it wants, but the demand for physical metal is a force the gold cartel cannot control. The key therefore to deciphering the actions of the gold cartel is to watch the physical market. The gold cartel cannot overpower the demand for physical metal because eventually it has to make good on its paper promises to deliver metal.

But for now the gold cartel has won a minor skirmish in the ongoing war it is waging to keep gold from trading in a free-market unfettered by government-directed intervention. Gold cartel short-selling has sent the metals back toward support, and over the next couple of weeks the metals will no doubt re-group.

Importantly, the long-term picture for gold remains very bullish as the dollar continues to be debased by out-of-control spending by the federal government that is leading to record deficits, record amounts of debt and record monetizing by the Federal Reserve. These factors all suggest a much higher gold price in the near future, which is the same conclusion of the following charts.

Gold is not only doing well against the dollar, but looks ready to climb against the Euro too. Most astonishing though is the gold chart in terms of British pounds, which looks like it is in the early stages of going parabolic.

I am bearish about the outlook for the US dollar, but this chart of the gold price in terms of pounds is making me re-think my view. This chart suggests that the British pound will collapse before the dollar collapses.

Silver too is doing well too. It is recovering in dollar and Euro terms much of the price decline it suffered in the deluge of selling after the Lehman Brothers collapse.

Again, the charts illustrate that the British pound is the weakest currency. The red line marking resistance is not a downtrend line like it is in the silver charts for dollars and Euros. Rather, it is the neckline of a 'head & shoulders' bottom. In this regard, the silver chart in pounds resembles the gold chart in dollars. Both look ready for prices to soar much higher, probably by September or October at the latest.

Consequently, we may now be at one of the last buying opportunities before gold climbs above $1,000 and silver climbs above £10. A 4-digit dollar gold price and a double-digit Sterling silver price may be just around the corner.