Examine the 20 year log scale chart of monthly gold.  I have drawn lines connecting highs and lows.  The result is an expanding channel or megaphone pattern.  The increasing prices are exponential (log scale chart) because of exponential increases in debt, money supply, and Keynesian craziness, although I have no graph to prove the latter.

Examine log scale charts for silver, crude oil, the Dow Transports, and the S&P 500 Index.  You can see similar exponential increases and megaphone patterns of much higher highs and deeper lows.

I have circled important chart lows and highs, and related lows and highs in the MACD and TDI at the bottom of the charts.  I have also added dashed lines indicating my estimate of the future direction of prices.

WHEN?  Ask the high frequency traders and central bankers, since they exert substantial influences on prices, but market forces cannot be repressed forever.

THE BIG PICTURE AS I SEE IT:

• Prices for gold, silver, crude oil, other commodities, and equities are exponentially increasing in the long term.
• Debt and money supply have increased exponentially and have driven prices much higher. Equities benefit for years and then commodity prices benefit for years.
• Equities have enjoyed a very long bull market. It may have topped.
• Bonds have been in a 30+ year bull market. When some European yields go negative past five years duration, it is time to anticipate the death of the bond bull.
• Central banks want to levitate bonds, levitate equities, and repress commodity prices. Clearly they have temporarily succeeded.  Their ability to manipulate prices may survive a while longer, but commodity prices will eventually follow the increasing debt and money supply.  Debt and money supply will increase, so in the long term commodity prices will also increase, unless there is a violent reset.
• Higher gold, silver, and crude oil prices are coming. Lower prices for bonds and equities are coming.

Read:

Craig Hemke:      Another Comex Oddity

Robert McHugh:  China’s stock Market Crash Likely Headed West

George Smith:     Why Central Banking Persists

Charles Hugh Smith:     Diminishing Returns

Gary Christenson

The Deviant Investor

There is a myth prevalent today that the gold price always falls when interest rates rise.

The logic is that when interest rates rise it is more expensive to hold gold, which just sits there not earning anything. And since markets discount future expectations, gold will even fall when a rise in interest rates is expected. With the Fed’s Open Market Committee debating the timing of an interest rate rise to take place possibly in September, it is therefore no surprise to market commentators that the gold price continues its bear market. Only the myth is just that: a myth denied by empirical evidence.

The chart below is of a time when the opposite was demonstrably true. From March 1971 to December 1979 the trends in both interest rates and the gold price rose and fell at the same time. It is worth noting that this occurred over more than one business cycle, so it is not a relationship which was cycle-dependant.

The myth is therefore satisfactorily debunked. To understand why this relationship between interest rates and gold is not as simple as commonly believed, we must take the argument further to bring in commodities generally and visit the tricky subject of Gibson’s Paradox. This paradox is based purely on long-run empirical evidence, when gold was transaction money, covering the two centuries between 1730 and 1930. It observes that the level of wholesale prices and interest rates are positively correlated. It is not the price relationship that is consistent with the quantity theory of money, which presupposes that interest rates correlate to the rate of price inflation instead of the price level itself. This maybe a reason why monetarists mistakenly argue, as we also discovered in the seventies, that central banks can manage the rate of inflation through interest rate policy. The common view in markets today about the relationship between interest rates and price inflation is wholly at odds with the longer-run evidence of Gibson’s Paradox and accords with the more fashionable quantity theory instead.

Gibson and his paradox are generally forgotten today, and those who centrally plan our money and markets appear unaware of the challenge it poses to their monetarist preconceptions. Keynes, no less, described Gibson’s Paradox in 1930 as “one of the most completely established empirical facts in the whole field of quantitative economics”, and Irving Fisher also wrote in 1930 that “no problem in economics has been more hotly debated”. Even Milton Friedman agreed in 1976 that “The Gibson Paradox remains an empirical phenomenon without a theoretical explanation”.*

Resolving this paradox can be left to another time; instead we shall consider the implications by looking at price relationships between wholesale prices and interest rates in a post-gold world. The next chart is of producer prices measured in gold compared with one-year Treasury yields.

I have taken the St Louis Fed’s “Producer Price Index by Commodity for Crude Materials for Further Processing” to more closely reflect commodity price trends, and to reduce the additional considerations of changes in processing margins over time. The one-year interest rate is preferred to the original evidence of Gibson’s Paradox, which used the yield on undated British Government Consols stock as being the only continual information on rates available, because we need to more firmly link the evidence to modern interest rate policies.

Looking at the chart, it is hardly surprising that Gibson’s Paradox was quashed from the time of the Nixon Shock in 1971, when the US unlocked a huge rise in the gold price by ending the Bretton Woods Agreement. Instead, the gold price took on a life of its own, driving down wholesale prices priced in gold for the next nine years. The rise in the index from 1980 to 2000 reflected gold’s subsequent bear market when gold fell from $800 to $250, but the influence of Gibson’s Paradox appears to have returned thereafter.

This conclusion might be considered suspect; but the chart tells us that not only are producer prices at their lowest for thirty-five years when measured in sound money, the price level also coincides with zero interest rates. In theory, it accords precisely with Gibson’s Paradox. So where do we go from here?

There is only one way for interest rates to go from the zero bound, it being only a matter of time, time which according to the Fed is now running out. Commodity prices in their role as raw materials therefore seem set to rise with interest rates, if the Paradox is still valid. Furthermore, the evidence from this analysis suggests that wholesale prices are suppressed even more than the price of gold. This being the case, when the interest rate cycle turns the potential for higher raw material prices measured in dollars could be truly spectacular, even more so in the event the gold price rises at the same time, which seems likely in the event that financial markets become destabilised by higher interest rates.

It is worth repeating at this point that the economic consensus, which adheres to the quantity theory of money and has been comforted by the apparent absence of consumer price inflation in the wake of the post-Lehman monetary expansion, takes a diametrically opposite view to that indicated by the Paradox. The prospect of a turn in the interest rate cycle is expected to drive the dollar’s exchange rate higher still, weakening commodity prices and gold even further. In the language of the dealers, everyone is on the same side of the trade, meaning the dollar is technically over-bought and commodities over-sold.

Gibson’s Paradox says it will turn out otherwise, and it could be central to linking the cyclical relationship between interest rates, securities markets, and commodity prices. It becomes much easier to see how these relationships tie together. Rising interest rates would almost certainly be accompanied by a potentially large fall in overpriced bond and stock markets as speculative positions are unwound, the former even undermining bank solvency ratios.

The flight of speculative capital from falling markets has to go somewhere, particularly if cash balances held in the banks are at a growing risk from systemic default. The Paradox tells us that these are the conditions for commodities to become the safe haven of choice for the highest levels of speculative money ever recorded since fiat currencies dispensed with their golden anchor. Ergo, Gibson’s Paradox probably still holds.

*All three quotes are taken from Barsky & Summers, National Bureau of Economic Research Working Paper No. 1680, (August 1985).

The views and opinions expressed in the article are those of the author and do not necessarily reflect those of GoldMoney, unless expressly stated. Please note that neither GoldMoney nor any of its representatives provide financial, legal, tax, investment or other advice. Such advice should be sought form an independent regulated person or body who is suitably qualified to do so. Any information provided in this article is provided solely as general market commentary and does not constitute advice. GoldMoney will not accept liability for any loss or damage, which may arise directly or indirectly from your use of or reliance on such information.

Few people believed me when I repeatedly warned that gold was still in a bear market and had not yet bottomed.

They said European Central Bank (ECB) money printing would surely light a fuse under gold and propel it higher.

They said the rising tides of terrorism and war around the world would surely send it higher.

They said inflation would come roaring back, and gold would soar.

They even claimed China was aggressively accumulating massive amounts of gold, cornering the market to make its currency, the yuan, the strongest in the world.

Some even said it will soon be known to all that our own Fort Knox doesn’t really have any gold and that our government got rid of it all years ago.

While others claimed the dollar was going to crash, and hence, gold would shoot the moon.

To each and every one of these and more stories and conspiracy theories I said, “BALONEY.”

They are all merely theories put out there by analysts who either don’t have a clue what they are talking about, or have gross conflicts of interest, pretend analysts who are really gold dealers in disguise.

Instead, I said, the main facts are these …

A. The world is awash in deflation and cash is king. You’ll be hard pressed to find inflation anywhere. And certainly not in the two biggest economies in the world, Europe and the United States.

Moreover, as I have said all along, hair-brained policies enacted by inept politicians in Europe and the United States have sent money largely into hoarding cash, which by default is bullish for the U.S. dollar and deflation, and bearish for most asset prices.

True, some money is going into alternative assets like diamonds, artwork and jewelry — but that’s big savvy money that largely wants to get off the grid.

After all, you can hop on a plane with $10 million worth of jewelry or even a Picasso, but try doing that with gold bars or coins and you’ll likely have it confiscated and possibly even end up in jail.

B. $10 trillion of money printing can’t do anything when global debts are as high as $500 trillion. How can $10 trillion of printed money by the world’s central banks possibly make a dent in the global debt monster of nearly $500 trillion of official and unofficial government debt?!

It can’t. Which is why all the money printing has done absolutely nothing to prevent deflation from taking hold.

C. Terrorism and war will not be immediately bullish for gold. One day — in the not-too-distant future — the majority of investors will wake up and smell the coffee: That Western governments of the world are going broke, and as a distraction, are engaging in policies that provoke both civil and international unrest and even war.

When that time comes, then gold will start to explode higher, with or without inflation. But for now, the majority of investors don’t know what’s going on.

So with almost every bounce in gold, they buy more. And then they get chewed up and spit out as gold plummets still lower.

This is a necessary process in the bottoming of any market, not just gold. The majority of investors cling to the wrong side of the market, almost all the way down.

D. China is not looking to corner the gold market. I’ve said this before and I’ll say it again until I’m blue in the face.

A gold standard, in any currency, is ultimately contractionary and deflationary. It has never once worked, despite what anyone tells you.

It can’t work. Why? Because authorities in charge of setting the official exchange rate between gold and paper money can change it at will. And because it subjects an economy to the nuances of new supplies of gold, or the lack thereof.

If China were to impose a gold standard, its economy would implode. It’s that simple and Beijing knows it.

Moreover, as I have also stated many times before …

1. China has never had a gold standard. Not once in its 5,000 year history.

2. China invented paper money. During the Tang dynasty (618-907). Known as “flying cash” that was backed by copper-based hard money, the paper notes were soon replaced by paper money with bank seals.

China’s paper money invention traveled westward with the Mongols, and by 1661, Marco Polo brought the paper money concept to Europe.

E. Western central banks have zero interest in gold. They too have no interest in a gold standard. Period.

In addition, as I have also stated before, many Western central banks will end up selling gold. Why? Two simple reasons:

1. Many are flat broke and need the cash. Greece will be among the first to dump gold (or be forced to). Portugal, Spain, even Italy and France will ultimately sell gold. As will other bankrupt European countries.

2. Neither the ECB or our own Federal Reserve want gold to be a part of today’s monetary system. They don’t even want paper money to be a part of it.

Instead, they are actively pursuing electronic currencies — so they can track and tax you and even shut down the banking system at the press of a button.

So what’s next for gold? How low can
it go before it finally bottoms?

Subscribers to my Real Wealth Report and my premium trading services have my more specific targets, as they should.

So all I can tell you right now is …

A. Gold will likely soon bounce higher. That in turn will get many analysts and investors excited, proclaiming the bottom is in. But …

B. Once that bounce is over, gold will cascade lower to well below $1,000 before bottoming.

So don’t be fooled. Gold will go still lower. And so will silver, platinum and palladium.

If you own inverse ETFs on any of the precious metals that I have suggested in the past, hold them. I’ll let you know when precious metals have bottomed so you can grab your profits.

Best wishes, as always …

Larry Edelson

We can’t count how many articles we saw today, bemoaning gold going down. The price action is bad for gold (whatever that means). China underreported their gold holdings. No, China doesn’t care about gold. No they want the price to go down so they can buy it cheap. No, they want to convince the IMF to include the yuan (which has capital controls, by the way) into the SDR basket. No, China really intends to revalue gold (whatever that means).

This is your brain on dollars. Any questions?

This is the worry of a dollar thinker. A dollar thinker buys gold for one reason: to sell it. Either he sells it when the price goes up, and he gets more dollars than he paid. Or else he sells it for less, and takes a loss.

But sell it, he must. Sell it, he plans. And his sole concern is the price of gold.

We would suggest that you, dear reader, think in gold terms. The dollar distorts prices, balance sheets, business plans — and thinking. Here is a graph showing the gold view of the dollar.

The dollar is going up. This is good for everyone with a bank account, a business, a pension, annuity, insurance. Or a job. It”s bad if you have made a leveraged bet to short the dollar using gold (e.g. buying gold futures on margin).

We suggest that you ought to be concerned with the scarcity of gold. Is gold coming onto the market as the price drops? Or is it disappearing into a growing shortage?

Even dollar thinkers can appreciate that if gold is becoming scarcer as its price falls, then the price will turn around. Probably abruptly. On the other hand, if the metal remains abundant, or becomes more so in light of a price drop, then the price could keep falling.

So what is it? What happened over the course of this long price drop?

Here is a graph showing the gold price. We have overlaid our gold scarcity measure, the cobasis, in red.

Some of the rise is due to the phenomenon of temporary backwardation. As we near First Notice Day of the August contract (at the end of the month), the cobasis tends to rise. However, there is also a proportional rise in the October contract (which has been in backwardation since Wednesday last week, when the price was $1149).

Now relax, Robin.