August 29, 2005 – It seems like yesterday, but it was six years ago when after describing the gold squeeze engineered by legendary traders Jim Fisk and Jay Gould in 1869, I wrote the following on August 16th 1999: “I believe that within two weeks, another gold squeeze will start from the depths of a typically hot and humid New York summer. Like the squeeze of 1869, the market now is far too complacent about both gold and the fiat currency of our day, the Federal Reserve dollar (which differs from a Greenback dollar in name only). And conditions are ripe for a successful squeeze.”
It was a good call, even though I was a bit early. The squeeze started four weeks later, rather than two, but gold climbed from around $260 when I wrote the above to over $340 by mid-October. It was a huge short squeeze, but like many squeezes, it did not last.
Though fundamental factors supported a higher gold price, gold eventually slid back down to $260 in early 2001 in what proved to be not only a successful test of support, but also a major double bottom. Gold has been rising ever since.
Gold has been rising because of another phenomenon I wrote about that August: “At $260, the price of Gold is abnormally low…Unlike fiat currencies, gold cannot be created by bookkeeping sleight of hand out of thin air. Therefore, central banks do not have an unlimited supply of gold, which is the necessary ingredient for any ongoing successful central bank intervention. Consequently, central bank manipulation of the gold market has limits.”
I think we are about to see those limits tested over the next several months. I am not expecting a rocket-shot like the one we experienced back in September-October 1999, though that outcome of course is always possible. But I am expecting much higher gold prices as the central banks face the stark reality that gold is undervalued. As a consequence, while they can try keeping a lid on the gold price through their usual tricks of jawboning, anti-gold propaganda and accounting sleight of hand, central banks cannot ultimately stop gold from climbing higher. They don’t have enough metal to back-up their short positions.
Eventually that reality will hit home, and that may be soon. Right now traders are putting central banks to the test.
Open Interest on the Comex has been climbing, as has the short position of commercial traders (i.e., their cumulative position is swollen by the short positions of the bullion banks who act as front-men for central banks as these chosen bullion banks secretly execute central bank trades). The net result is that sub-$432 gold may be an item of the past, never to be seen again. But it is not only gold that seems to be at an important turning point.
The stock market looks ready to take a big fall. Take a close look at the accompanying chart of the Dow Jones Industrials Average. Not only has it formed a huge topping pattern, it is carving out a weak double-top. After months of trying, the DJIA has been unable to climb back to its all-time high, which is a sure sign of underlying weakness.
What’s more, the DJIA has failed to make even a recovery high above the level reached earlier this year. The DJIA is now below its 200-day moving average, and as of last week has broken down through the uptrend line that has marked its progress over the past three years.
I expect the Dow to trade back under 10,000 within the next few weeks. When that level is broken, it will be a wake-up call that will result in a much greater level of selling and lower prices.
The second chart above shows what will be the combined effect if I am right about both gold and the stock market. It shows the S&P 500 Index in terms of goldgrams (i.e., one gram of gold and the currency of my company, GoldMoney.com).
I like this chart very much. It enables us to see through the illusion that the stock market has been climbing over the past few years. When measured in terms of gold, the reality is that stocks have been moving sideways.
As we can see on the above chart, the S&P 500 Index has formed a huge consolidation pattern, and it is a bearish looking one at that. It looks like the downtrend on this chart is about to resume, meaning gold is about to outperform stocks, or in other words, one will be better off by holding gold instead of the S&P 500 Index.
It is no secret that sometimes one should be in cash rather than stocks. This chart of the S&P 500 is saying that now is one of those times. Stay in cash (i.e., gold) and out of stocks, excepting of course my recommended gold stocks.
I’ll conclude with this quote by Bill Murphy from his August 25th commentary at www.lemetropolecafe.com: “The Working Group on Financial Markets has been working overtime to hold the US financial markets together. By keeping US interest rates relatively low, it has helped foster a housing bubble, which has been the main cog in the US economy holding its own, while energy prices are soaring. However, it has led the US consumer into a false sense of security. The US consumer has its smallest savings ever and has little cushion in case of a serious economic downturn.
In addition, because of this general market manipulation and artificial suppression of the gold price, they have little fear of economic loss. They have been lulled to sleep with excessive consumption habits and by making investment decisions they might not otherwise have made with more fear in their hearts about the future. There is huge trouble lurking behind the scenes” which Bill concludes “ought to be apparent to any one with an open mind.”
My objective is to share with you my views on gold, which in recent decades has become one of the world’s most misunderstood asset classes. This low level of knowledge about gold creates a wonderful opportunity and competitive edge to everyone who truly understands gold and money.
