A recent article on the Wall Street Journal’s blog draws attention to the high cost of producing a single penny – 1.6 cents each, to be exact. They blame this unsustainable price on the high cost of zinc, which makes up 97.5% of every American penny. The online publication Quartz ran with this story, giving it a new headline: “It costs 1.6 cents to make one penny because of the rising price of zinc”. Time for a short economics lesson. (Ed note: Richard Russell has an article that boost Pete’s point about currency debasement HERE)

An alternate, more accurate headline for this story would be, “It cost 1.6 cents to make a penny because of currency debasement.” Rather than pondering whether or not the United States should simply stop producing pennies to save money, Americans should really be thinking about the long-term effects of currency debasement that has been going on for generations.

To debase a currency is to weaken its purchasing power. This is often done by inflating the money supply through quantitative easing, which the Federal Reserve has been practicing for years. When a currency is debased, a unit of that currency doesn’t buy the same amount of stuff that it once did. The US dollar has been seriously debased over the last hundred years or more. Just take a look at the handy infographic at the end of this blog post to see how bad it has become.

Currency debasement is the same reason why the US ditched the copper penny in 1982, as well as silver half-dollars, quarters, and dimes in 1964. Today we call these old silver coins “junk silver,” and they’re popular physical precious metals investments. However, they’re anything but junk – they actually contain a useful commodity that has held its value for centuries. It’s not that zinc or copper or silver has become “too expensive,” it’s that those coins have lost some of their purchasing power.

The government debases our currency and says it is because it became too expensive to produce instead of the real reason – destructive monetary policies. The policies of central banks around the world are supposed to stabilize economies and protect the people from currency debasement. However, the truth is that these policies only enrich the politically well-connected, while hurting the poor, those on fixed incomes, and savers.

When currencies aren’t debased, prices tend to fall, not rise. This gives more purchasing power to the poor, those on fixed incomes, and savers. It also decreases the need to gamble savings in the stock market, which means you have fewer bubbles like the one we’re experiencing right now.

So the next time a friend brings up the pretty well-know fact that it costs more to produce a penny than its worth, take the time to educate them about currency debasement.

his article first appeared on Peter Schiff’s Gold Blog.

To learn more about the destructive monetary policies of central banks and how to protect yourself from a collapse of the US dollar, subscribe for free to Peter’s Schiff’s Gold Videocast.

Can Gold Act as a Safe Haven Again?

Christos Doulis says six years ago when the financial crisis was in full swing, safe-haven buying made gold skyrocket. Today, the fear component is down, as is the price of gold. That is why Doulis believes investors need to own bulletproof, low-cost names that can survive this environment. In this interview with The Gold Report, Doulis discusses some M&A possibilities and points to management teams getting the most out of their low-cost precious metals assets.

Companies Discussed: Cayden Resources: Integra Gold: Sierra Metals: Silver Wheaton: Agnico Eagle Mines Ltd.: Alexco Resource: Endeavour Silver: GoGold Resources: Goldcorp Inc.: Premier Gold Mines: Rio Alto Mining: Yamana Gold Inc.

Forget all the news, all the fundamentals, all the [mostly errant] price projections. There is a reason why a picture is worth more than 1,000 words, and this is one of those times where it is best to focus on pictures of the market, over various time frames, to get a better handle on what to expect moving forward. Put to rest every so-called PMs pundit or blogger that has persistently been calling for higher prices or saying the low is in.

We keep saying that the best and most reliable indicators come from the market. Time to stop listening about what others have been saying about the market and pay closer attention to what the market is saying about others. Several months ago, we expressed the thought that 2014 would likely be more like 2013 and to not expect a dramatic increase in gold and silver prices. Even that was optimistic as silver just reached recent 4 year lows.

Are the markets manipulated? Absolutely! The United States and United Kingdom are both in the throes of desperation to keep alive the largest ever Ponzi scheme, that of Western central banks run by the unelected bureaucrats of the Bank for International Settlements [BIS], and all of the similarly unelected bureaucrats from the International Monetary Fund [IMF], who rule over all Western governments. Gold, and silver to a much lesser extent, are the proverbial wooden stake to be driven into the heart of the fiat system which rules over your life, realize it or not, like it or not.

Have these unseen faces been successful in suppressing PM prices? Without question. Can it continue? Without question, but the increasingly pertinent question now is, for how much longer? No one has the answer, which has been proven despite the never-ending opinions asserted over the past few years. With each passing month it becomes sooner rather than later, but even sooner is taking longer than most have expected.

A look at the charts tells us in no uncertain terms that the end is not yet in sight. Here is our read of what the market is saying, and has been saying for some time. We start with silver because it just broke to low levels not seen for the past 4 years. The importance of acknowledging the trend deserves front and center attention because this simple circumstance is so often overlooked for its power to prevail over price direction. Bearish spacing is also mentioned because of what it connotes: a bearish undertone in the market. With successive lower swing highs, the message of both the trend and bearish spacing have gone unchallenged, and that means there is no way the down trend can end. The KISS principle at work.

Even in a down market, past support still has validity to check, at least temporarily, any downward momentum. It does not mean a turn in trend is imminent, so one should not read sentiment into market reality, rather, just be aware and pay closer attention to how price develops/reacts around this possible support area.

The weekly chart is context, and we look at the daily chart for more clarity, if any is to be found.

Larger Chart

There are no definitive signs of trend change. None. We can see that silver has reached an oversold market condition. That being said, it can never be forgotten that oversold can easily become more oversold, so this current condition is no reason to take a position from the long side in anticipation of an upside reaction.

Ask yourself a simple question. Over the past 4 years, how many longs are showing a profit? Counting on just one hand may provide an adequate answer. Is that the kind of position in which you want to find yourself? This is why the trend is your friend.

Larger Chart

Trust us, a 60 minute chart is not going to overrule to strength of a weekly chart. What we want to see here is how the market looks in the aftermath of last week’s decline. The picture tells an interesting story not seen on the weekly or even the daily chart. What you have to understand is the role volume plays in any market. It is akin to the energy, or the lack of energy behind any market move.

When you see sharp volume increases, pay close attention for it is usually smart money making a move, preferably without being detected. Knowing how to read volume activity, an art more than not, the intent of the market movers becomes more apparent. We are all like minnows that can buy and sell without any impact on the market. Smart money has substantial position size that must be moved over a period of days, sometimes weeks so as to not impact the market and show their hand.

The first line, marked “1″ at the bottom of the chart, shows the average volume turnover on any given day. The second line, “2,” shows notable volume pick-up and should be viewed more closely because the large market movers are doing something without trying to tip their hand.

Then, there are the exceptional spike volume standout days, such as what occurred last Friday as silver descended to 4 year lows. Anytime there is such an extreme, count on it being a change from weak hands into strong hands. Here, weak-handed sellers and stops are being triggered, and it is strong hands that are buying, strong hands that generate the exceptionally high volume. The public does not have the ability to independently create such strong volume, rather, the public reacts to it, almost always to its detriment.

What the intra day market activity from last Friday does is create a need to focus very closely on HOW the market develops over the next several days. Notice has been served that something important just occurred. When silver activity is viewed along with what transpired in gold, at the same time, the potential for change becomes a higher probability, but one that must still be confirmed.

The market is “speaking” for those willing to pay attention.

Larger Chart

The standout difference between weekly gold and silver is that gold has not made a new recent low. In fact, gold did not even reach the TR support [Trading Range]. Is the market “speaking” here? Yes. In fact, it does all the time, the trend being its most important message for it tells everyone that the market momentum will persist in one direction for some undetermined length of time.

The market message we see is more at hand, and it is shown by the smaller TR from last week, compared to the two preceding weeks as the market has declined. The smaller range tells us that the downward momentum was stopped, to a degree, at a point in time where sellers have clearly been in control.

The fact that buyers prevented sellers from moving price lower than occurred does not mean the trend is changing, but it is a piece of information, just like in a jigsaw puzzle where one piece may not mean anything special, but when combined with a few other pieces interconnecting, a part of the puzzle become clearer.

A look at the daily chart may provide additional insight.

Larger Chart

Within the same down channel as silver, gold did not even reach its lower support channel line, and that is a tribute to buyers for preventing sellers from exerting more influence with momentum on their side. We discussed how last week’s smaller range might be an important message, and the daily activity shows why.

Focus on the last 3 bars, all with red volume because each close was lower than the day preceding. The 3rd bar from the end was the widest range and lowest volume, and it tells us the there was Ease of Downward Movement [EDM], but the close was in the upper 3rd of the range, buyers winning the battle over sellers that day.

On the 2d bar from the right, volume increased, the bar range was smaller, and the close was near the high of the day, again, buyers are showing up and controlling sellers. Friday’s bar is the most interesting. Volume was second highest of the month. Increases in volume are usually attributable to smart money intervening, [which may account for why the prior two bars had higher closes; smart money trying to disguise their buying activity].

The question to be asked is, why did smart money increase the effort, via increased volume when price was at the low? It is not because they were selling into a hole, but more likely scooping up all the offerings from sellers and stops being triggered by the lower prices. Reading volume is an art form, and one can sometimes, even often, be wrong.

Maybe the intra day chart can add to the interpretation?

Larger Chart

Indeed it does. The chart comments explain the set-up. Comparing the activity, [volume effort and extent of resulting price movement] between Wednesday and Friday confirms what was surmised on the daily chart read. Pay attention to these two days and what they mean for you will see this kind of activity repeat itself over and over in all markets and over all time frames. Frankly, most people do not know how to read charts, and that is why they offer opinions about what they think is happening instead of what the market is actually saying.

The volume effort from Friday is clearly higher than the volume effort from Wednesday, yet the EDM was much greater on Wednesday than it was on Friday. Here, you can see readily that strong hands were very active buyers on Friday, taking everything sellers had to offer, as well as all sell stops.

Will this mean a change in trend? No, but it could be an important step that leads to a change, if we see evidence that buyers are persistently putting in a greater effort than sellers. We need to be patient and wait for confirmation. Actually, there is no other choice. Those too impatient to wait for more confirmation are the ones who were more than likely selling out their longs on Wednesday and Friday from higher prices.

What does this mean for holders of the physical? More buying opportunities. What about those who bought at higher levels and have seen a “loss in value?” Ask yourself this question? Are you going to sell any of your holdings at these low levels? If no, then do not be bothered about where price is, unless you are buying more. One has not “lost” anything unless one sells. You have the best form of wealth preservation insurance for what is inevitable, and 5,000 years of history is on your side.

We have purchases of silver when priced at 47, and gold at 1,800. Is there any concern over having paid much higher prices? Not in the least. The reason for buying has not changed, and there was more buying of silver on Friday when price was just under 18. We practice what we preach.

It is wrong to focus on what one paid over the past few years as price peaked. It is necessary to look at the broader time frame. Those who have been buying silver since $4 and gold since $300 continue to do well. Keep in mind, a quarter made of 90% silver still buys a gallon of gas at today’s prices. When the price of PMs one day jumps a few hundred percentages overnight, as is likely to happen, those who paid top dollar for either metal will be overjoyed at their smart decision-making, although that is not currently how they feel.

The preference is for silver over gold, at this point where the ratio is around 68:1. In fact, in line with the previous article, Use Magic Of Gold/Silver Ratio, we are starting to look at switching some gold into silver. As a reminder, assume you exchange 10 oz of gold at 65:1, getting you 650 oz of silver. At some point in the future, the ratio may go under 35:1 or 30:1, and you switch back 650 oz of silver to gold at 40:1. You will then have 16 oz of gold, 60% more than previously held, all without risk, just by “playing the ratio.”

Steady the course PM holders. Add whenever possible

http://edgetraderplus.com/

The James Turk Fear Index has always been interesting www.fgmr.com.

It is an easy concept. The Turk Fear Index is a measurement of gold’s relative value in relation to currency. The Turk Fear Index centres on the US by comparing gold’s value to money but a fear index could be calculated for any country and any currency and for that matter the world as well. The US being the world’s largest economy is most likely a good indicator for the rest of the world.

The Turk Fear Index compares the stock in gold held by the central bank with the country’s currency outstanding (money supply). The Turk Fear Index uses M3 the broadest definition of money supply. The formula is simply

Besides being a measurement of gold’s relative value it measures gold trends. In that respect, it is not a lot different from the Dow Jones/Gold ratio. When the index is rising, there is concern or fear for the stability of the country’s monetary and banking system. When it is falling, it suggests that confidence has been restored. As can be seen there was growing concern about the US’s monetary and banking stability from 2001 on. That culminated in the financial collapse of 2008 when the global banking system almost collapsed because of the weight of bad loans backed by derivatives that few understood. The world (primarily the US, EU and Japan) embarked on a massive bail out of the financial institutions and a program of quantitative easing (QE). Since 2009, the US has had three programs of QE although they are currently in the process of winding QE3 down.

Gold and the Fear Index peaked in 2011. After that, it appears as if confidence has been restored and the Fear Index has been falling (along with the price of gold). The world and the US have been going through a period of grudging slow economic growth and the financial system appeared to have returned to stability. With confidence seemingly restored, the world has gone back to its ways prior to the 2008 financial collapse.

Governments have passed legislation that would shift the burden of bailouts of the banking system at the expense of the taxpayer in the event of a financial/banking collapse to a system of bail-ins where the depositor’s and bond holders funds would be at risk (subject to the limitations of bank insurance that covers deposits). Little or nothing has been done to change governance in financial institutions. The US banking lobby has fought successfully against reinstating Glass-Steagall that limited securities activities in banks and securities firms.

In 1999, Glass Steagall was repealed and affiliations between banks and securities firms got underway. In the US a small handful of bank/securities firms dominate. They include JP Morgan Chase, Citibank, Bank of America, Goldman Sachs and Morgan Stanley and Wells Fargo Bank. Goldman and Morgan Stanley are two former securities firms who have converted themselves into bank holding companies in order to be eligible for FDIC insurance as would the banks. Canada broke down its four pillars (banks, trusts, insurance and securities) in the late 1980’s. The big five banks dominate Canadian banking and securities.

What ending Glass Steagall and breaking down the four pillars did was to allow the securities arms of the giant banking institutions to use the balance sheet of the bank for securities trading. This allowed the securities arms to leverage up the bank’s balance sheet 20, 30, 40 and 50 to 1 and sometimes higher. If things went wrong as they did in 2008 it was okay as the taxpayer through FDIC in the US and CDIC in Canada could bail out the bank. The major banks in the US received over $700 billion under a program called TARP and banks in Canada also received bailout money. It all came from the taxpayer. The money has been mostly paid back but the bank/securities firms went right back to their previous ways using the banks’ balance sheet to leverage up their securities trading operations. Leverage today is as high as it was pre-2008.

Since the financial crisis of 2008, debt has grown considerably. According to the Bank for International Settlements (BIS), global debt has grown by roughly 40% since 2007 to $100 trillion. As central banks in the western economies have suppressed interest rates, borrowing has soared. While a great deal of the debt growth has been government, individuals and corporations have also increased their borrowing. Tradable US Government debt has soared from $4.5 trillion in 2007 to over $12 trillion today. Globally corporate debt has soared roughly $21 trillion.

There has also been considerable growth once again in sub-prime type lending that was at the centre of the 2008 financial collapse. The growth has come in housing, which was the area behind the 2008 financial collapse as well as student loans and other areas such as car loans. Derivatives have also grown as debt has grown. Today it is estimated that total global derivatives outstanding exceeds $1 quadrillion although official figures show roughly $750 trillion. The major US banks noted above dominate this business in both the US and globally.

Rather than creating a system of stability and confidence, the old practices have continued and the amount of debt outstanding has soared. A shock to the financial system similar to what occurred in 2007 with the sub-prime crisis could cause a financial collapse larger than what occurred in 2008. Yet the Fear Index is not reflecting that. Has complacency that nothing could go wrong overwhelmed common sense? The perception is that the government has the banks backs and if anything does go wrong government would come to the rescue irrespective of the shift from a bailout program to a bail-in program.

The Fear Index is testing support of a rising trendline from the low of 2001. This is not dissimilar to the price of gold itself that is testing its long-term support. Yet there remains fear that gold is going to collapse even further to $1,000 to $700. Gold sentiment is close to where it was at the 2008 financial crash low although still above where it was in 2001.

With sentiment so low, (yes it could get lower) odds are more favourable for a rebound to get underway rather than another collapse. Yet the possibility of another collapse remains. The background is becoming potentially more negative. Global geopolitics are causing instability. The ramping up of the war against the Islamic State (IS) is probably not a potential flash point to trigger a financial crisis. But the war has cost the US roughly $500 billion so far and it has barely begun. The previous wars in Iraq and Afghanistan cost the US between $4 to $6 trillion. The cost of the wars are added directly to the US debt.

A possible overlooked issue concerning the war with IS is that IS is trying to change the borders of countries that have existed since the Treaty of Paris 1919 when Britain and France divided up the remains of the Ottoman Empire after WW1 with little regard to the people that lived there. IS had been operating in Syria and the war against IS did not begin to ramp up until IS crossed the border into Iraq and began to tear down symbols of the border in order to create a Sunni caliphate stretching from Syria into Iraq. If successful IS could seize the Kirkuk oil fields in the north of Iraq. These oil fields are currently under some control from the Kurds.

The crisis in Eastern Ukraine has more potential to become disruptive. Sanctions against Russia are trade sanctions. Russia is the world’s 8^th largest economy and has the potential to strike back economically. Trade wars do not work. They are lose-lose and not dissimilar to the “Beggar thy neighbour” policies of the 1930’s. Those policies, many believe, contributed significantly to the Great Depression.

The financial situation in the world is tenuous. There are numerous signs that many of the EU banks are insolvent. The US banks have major liquidity concerns. The EU is planning on embarking on another round of QE. Japan has been providing QE for the better part of two decades and all it has accomplished is that their government debt to GDP ratio has jumped to the highest of all the major western economies in excess of 200%. The US government debt/GDP ratio is over 100% yet everyone is touting that the US economy is recovering even as the EU and Japan are sliding back into recession and the Mediterranean countries in the EU remain in a depression. Numerous EU countries have debt/GDP ratios over 100 and even the major EU countries (Germany, Britain, France) have debt/GDP ratio’s over 80. A debt/GDP ratio over 100 could shave at least 1% off economic growth according to most economists.

Worse, the debt ridden western economies led by Britain and the US are pressuring NATO members to ramp up their defence spending because of Russia and the crisis in Ukraine. Given that many of them are suffering under austerity measures or trying to cut back on debt, it will most likely be left up to the US, the world’s most debt ridden nation, to lead the NATO forces in Europe.

Separation movements are underway in a number of countries and this could prove to be quite economically destabilizing if they are successful. With polls showing that the Scotland separation could be successful, it has already caused the British Pound to fall sharply and British politicians to rush to Scotland to try and convince them to stay. Political careers are riding on the outcome. Economic and social instability could follow a yes vote.

In Spain, there is a referendum to be held in Catalonia. Support for leaving Spain is split.  If Catalonia were to leave Spain, it could be very disruptive to the Spanish economy where they have 25% unemployment, 50% youth unemployment, have already come close to debt default and there has been ongoing social unrest including clashes with police.

If Scotland were successful in separating from Britain (after 300 years) it could embolden other separatist movements in Europe, Asia and even North America where in Canada there have been separatist movements in Quebec and Alberta and even in the US where secession papers reached the floor of state Congress’s in a few instances. Depending on the separatist movement, it could be peaceful or it could be met with a military response as is being seen in Ukraine.

Sharply growing debt; failure to correct the excesses that were a cause of the 2008 financial crash; insolvent banks being propped up by QE programs; growing geopolitical instability with the potential for war between the Great Powers; and, separation movements in a number of countries that could cause economic, financial, social and military disruption and embolden other separation movements.

Where’s the fear? The Turk Fear Index is testing a rising trendline from the 2001 low. This appears to be not dissimilar to the test of the rising trendline in the 1970’s. When the Turk Fear Index turned up again gold soared from $100 to $850. Gold sentiment is quite negative. Stock market sentiment on the other hand is at levels seen at the 1987 and even above the tops of 2000 and 2007.  Stories of gold collapsing to $1,000 and even $700 abound and the DJI soaring to 20,000 and 25,000.

Against this background Russia and China are continuing to try to move away from use of the US$ for trade purposes. China has arranged numerous swap agreements with a number of countries in order to conduct trade in Yuan. The most recent one is with Argentina.  Yuan trading hubs are being created in a number of countries. Russia and China are in the process of building a major pipeline that will allow Russia to refocus its energy exports to Asia rather than the EU. Russia and China will conduct trade in Rubles and Yuan. Russia is starting to demand payment in Rubles from the EU. These are attacks on the hegemony of the US$ as the world’s reserve currency even though neither the Russian Ruble or the Chinese Yuan have convertibility and global acceptance as does the US$.

The world appears to be entering a potential period of economic, financial, geopolitical and social instability. Fear is in the wind. But is anyone paying attention?

TECHNICAL SCOOP

CHART OF THE WEEK

Charts and commentary by David Chapman

26 Wellington Street East, Suite 900, Toronto, Ontario, M5E 1S2

Phone (416) 604-0533 or (toll free) 1-866-269-7773 , fax (416) 604-0557

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www.davidchapman.com

Copyright 2014 All rights reserved David Chapman 

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Scotland voted to remain part of the United Kingdom, Alibaba (BABA) is going to become the United States largest initial public offering (IPO), U.S. stock market indexes are up nearly 2% this week, Treasury yields are near lows, and gold and silver prices are getting bludgeoned in the paper market.

While U.S. financial prognosticators are raving over Alibaba and the IPO, the price action in precious metals and in the broader U.S. equity indexes showed signs of weakness about the time it was announced that Alibaba could start trading in the low to mid eighties.

The gold and silver charts shown below demonstrates the strange price action in silver futures after the announcement regarding Alibaba’s likely price increase at the open of trading in the stock today.

The chart below shows gold futures prices during the same time frame as the silver chart above.

The hype surrounding the Alibaba IPO is almost nauseating. However, it may provide an excellent trade entry into a long position in precious metals. Both gold and silver have been under major selling pressure for several weeks.

In silver, the selling pressure started around July 15th of this year and the selling has not stopped. Silver futures prices dropped from roughly $21.50 to $18.50 an ounce in about two months. This represents a near 14% decline in the price of silver over the past 2 months.

Gold prices have also seen strong selling over the same period from July 15th to present. Gold prices fell from around $1,340 per ounce to a recent low slightly below $1,220 per ounce. Gold prices dropped nearly 9%, showing some strong relative strength against silver futures.

We have been watching the precious metals sector very carefully for several weeks and price action seems poised for a bounce as major support is underneath both silver and gold futures here. A break of these levels would trigger some potentially strong selling pushing metals prices considerably lower. The daily chart of gold futures is shown below:

The $1,180 – $1,200 price level has shown major support for gold futures prices which is clearly depicted on the weekly chart of gold futures shown above. We are contrarian traders and the price action in precious metals is ripe for a potential bounce. We view the opportunity more as a trading opportunity than an investment opportunity for now, but that could change in the longer term.

As an options trader, we will likely use a put credit spread using the gold ETF (GLD) as the underlying asset. The trade will have defined risk and will capitalize on higher gold prices, the passage of time, and reduced volatility in GLD options. Recently the options alert service from TheTechnicalTraders has put up some huge winning trades and the track record has been impressive thus far.

About Chris Vermulen

Founder of AlgoTrades Systems., internationally recognized market technical analyst and trader. Chris is also the founder of TheGoldAndOilGuy.com, a financial education and investment newsletter service. He is responsible for market research and trade alerts for of its newsletter publication. He is the author of “Technical Trading Mastery – 7 Steps To Win With Logic” and has  been featured in Futures Magazine, Gold-Eagle, Safe Haven, The Street, Kitco and dozens of other financial websites.