October 6, 2014
London, England

For the benefit of anyone living under a rock these past weeks, Bill Gross, the so-called “Bond King” and manager of the world’s largest bond fund (PIMCO), jumped ship before he could be shoved overboard.

PIMCO’s owners, Allianz, must surely regret having allowed so much power to be centralized in the form of one single ‘star’ manager.

In a messy transfer in which nobody came out of well, Janus Capital announced that Bill Gross would be joining to run a start- up bond fund, before he had even announced his resignation from PIMCO (but then again Janus was a two-faced god).

This was deliriously tacky behavior from within a normally staid backwater of the financial markets.

Some financial media reported this as a ‘David vs Goliath’ story; in reality it is anything but.

The story can be more accurately summarized as ‘Bond fund manager leaves gigantic asset gatherer for other gigantic asset gatherer’ (Janus Capital’s $178 billion in client capital being hardly small potatoes).

This writer recalls the giddy marketing of a particularly new economy-oriented growth vehicle called the ‘Janus Twenty’ fund in the UK back in 2000.

Between March 2000 and September 2001, that particular growth vehicle lost 63% of its value. Faddish opportunism is clearly still alive and well.

We discussed this last week, highlighting this seeming anomaly that even as there has never been so much debt in the history of the world, it has also never been so expensive.

This puts the integrity of markets clearly at risk. And we have long sought alternatives that offer much lower credit and counterparty risk.

The time-honored alternative has been gold.

In fact, as the chart below shows, gold has tracked the expansion in US debt pretty handily (editor’s note: the correlation between the two is a strong +0.86).

You can see in 2011, the rise in the gold price became overextended relative to the rise in US debt. Then it decoupled and went in the opposite direction.

This is a similar trend to what occurred in the early 1980s. And if one expects that relationship to resume (we do), then gold looks anomalously cheap relative to the rising level of US debt.

A second rationale for holding gold takes into account the balance sheet expansion of central banks:

If one accepts that gold is not merely an industrial commodity but an alternative form of money, then it clearly makes sense to favor a money whose supply is growing at 1.5% per annum over monies whose supply is growing up to 20% per annum.

A third rationale for owning gold is best summed in perhaps the most damning statement to capture our modern financial tragedy.

“We all know what to do, we just don’t know how to get re-elected after we’ve done it.”

This is from Jean-Claude Juncker, former Prime Minister of Luxembourg and current President-Elect of the European Commission.

It’s clear there is a vacuum where bold political action should reside. Elected leaders continue to kick the can down the road and ignore dangers to the system.

And in this vacuum, central bankers have stepped in to fill the void via bond yields that are below the rate of inflation.

They say that to a man with a hammer, everything looks like a nail.

To a central banker facing the prospect of outright deflation, the answer to everything is the printing of ex nihilo money and the manipulation of financial asset prices.

This makes it incredibly difficult to shake off the suspicion that navigating the bond markets over the coming months will require almost supernatural powers in second-guessing both central banks and one’s peers.

For what it’s worth this is a game we won’t even bother playing.

Our pursuit of the rational alternative – proper forms of money and compelling deep value in equity markets – continues. More to follow on this.

[Editor’s Note: Tim Price, Director of Investment at PFP Wealth Management in the UK and frequent Sovereign Man contributor, is filling in for Simon today.]

Answer: Taking the metals down short-term is simply a function of further liquidation and a rising dollar. Long-term, I do not see where a return of a bear market is possible. The gold promoters talk about debt and hyperinflation. But that fails to look at real history rather than the few examples of revolutionary governments. The common bond between the hyperinflation of Germany, Hungary, Zimbabwe, France, and colonial America (Continental Dollars) is not paper money – it is the collapse in confidence in government. That unfolds in placed in Germany and Zimbabwe when there IS NO DEBT because people will not buy their bonds. When there is a debt and the government is an established one with power, they first turn against the people and hunt taxes, twist the

rule of law so they win, and that creates deflation. The final nail comes like it did in the city of Mainz – no bid for the debt.

The assumption by the gold promoters has been they will just print more money to cover the debt. But honestly, that requires confidence to keep the game afoot. This is the common element. We will see the decline and fall in an OMG event and not progressive hyperinflation. France has already lost confidence of the people. Hollande has perhaps the lowest support number in all of history. But to save France, there will need to be another revolution for he is determined to stay where he is for the full term. France will crack and the EU may move to inflation BECAUSE they failed to establish a national debt market – one currency requires one debt and one government. As confidence in the EU is collapsing, now they are talking about issuing a national debt. But it is too late. They are exactly in the position of Germany and Zimbabwe compared to the USA which has a debt that is now supporting the world economy as reserves. There are important economic differences at stake here. This is not an issue of OPINION. There are serious structural differences that we will see as this unfolds.

So I do not see gold entering a long-term bear market. We have downside to contend with, but this is how markets simply function. Rome kept raising taxes and twisting the law so people just walked away from their property. They could not pay the taxes and the population moved to the suburbs started farms and relied upon themselves returning to a Villa economy of self-sufficiency.This then was transformed into serfdom for protection from barbarian invasions. Taxes kill the economy and cause people to move just as I reported they are moving from North to South inside the USA.

….more from Martin Armstrong:

Benchmark Cycles

Palladium – To Be or Not to Be

Wave Compression with Technology

Alan Greenspan, former Chairman of the Fed, had an article entitled “Golden Rule – Why Beijing Is Buying” published in Foreign Policy, the journal of the influential Council on Foreign Relations in which he extols the virtues of gold as “universally acceptable.”

Greenspan, former Chairman of the Federal Reserve Board of the United States from 1987 to 2006, and a key architect in the global financial crisis, points out that if the world’s largest gold consumer, China, used a portion of its massive $4 trillion foreign exchange reserves to buy enough gold bullion it could displace the U.S. as the world’s largest holder of gold bullion. The U.S. holdings are believed to be just over 8,500 tonnes with an estimated value of just $328 billion as of spring 2014.

….continue reading HERE

….related: Currency Wars ! Russia, Kazakhstan Buy Very Large 30 Tons Of Gold In August

Gold has broken below $1200 this morning in what should begin the final breakdown. In weekly and monthly terms $1200 was the remaining support. Sure Gold could bounce from $1180 but todays breakdown is more significant. Both metals are now in breakdown mode while the mining stocks continue to slide. There is more downside ahead and bulls should continue to stand aside before a favorable buying opportunity emerges.

The monthly chart of Gold and Silver is below. We know that Silver has already broken down. It peaked before Gold and could bottom first. Silver is trading at $16.88 as I pen this. The next major monthly support is $15. With Gold trading at $1192, its next monthly support is below $1100. The 50% retracement is at $1080 and more support lies at $1040.

Those downside targets fit well with the bear analog charts. In this Gold specific chart we removed the two extreme bears. We can see how the current bear compares to three other bears.

The bear analog chart for Silver suggests its current bear market will end first and is very close to ending. In price terms this is now the second worst bear market ever for Silver. In terms of time it is close to being the third worst bear ever.

Turning to the miners, the HUI Gold Bugs Index is trading at 190 as we pen this. The weekly line chart shows 168 as very strong multi-year support. That is about 12% downside from current prices.

GDXJ (not shown) has been the strongest of the mining indices. It was the last to break its May low. It has 9% downside to its December low. GDXJ was down 82% at that low. Any breakdown to a new low is very likely to be a false breakdown given the current age and severity of the bear market.

We were bullish most of 2014 but quickly changed our tune as the evidence shifted. In our most recenteditorial we noted the downside risk but the eventual shift from risk to an amazing opportunity. These charts are a few of the tools we can use to potentially identify the start of that amazing opportunity. For now, Gold and Silver continue to have more downside until very strong support targets. The same goes for the mining stocks. I see a potential lifetime buying opportunity in the weeks and months ahead. We invite you to learn more about our premium service including a report on our top 5 buys at the coming bottom.

Good Luck!

Jordan Roy-Byrne, CMT

Jordan@TheDailyGold.com