Frye's Gold and Silver

Sep 3, 2009 It looks as though the multi-month correction in precious metals is coming to an end and very soon, we are going to get a major move. If the bull-market is still intact, then gold should break above US$1,000 per ounce within a few weeks. However, if the price of gold fails to do this, we could see a sharp decline in bullion and precious metals mining stocks. Put simply, if the price of gold fails to climb past US$1,000 per ounce and instead, it falls below US$920 per ounce, it will be a negative omen. At that point, our suggestion would be to immediately sell precious metals and related stocks.

Yes, the macro-economic is wildly bullish for precious metals and we have been bulls since 2001. But this has now become a very crowded trade and in order to sustain the bull-market, gold must trade above US$1,000 per ounce. Today, most precious metals investors are positioned for an explosive rally and if gold fails to climb to new highs very soon, we may get forced liquidation from the frustrated bulls. Under this bearish scenario, the price of gold and other precious metals could plummet and this is the reason why we are suggesting that you exit your ‘long’ positions if gold breaks below US$920 per ounce. Although the weekly chart for gold looks like a gigantic ‘inverse head & shoulders’ bottom formation, it could also turn out to be a massive double top. Remember, gold’s chart pattern looks eerily similar to copper; just before it staged a spectacular decline last year. So, we will have to wait and see how things play out for precious metals.

In our view, the direction of gold’s breakout will depend on the US Dollar Index, which is currently trading above a major support level. Yesterday, the US Dollar Index managed to break out of its declining trend and this is good news for the greenback. Over the following days, if the US Dollar Index closes above the 80 level, it will be a big positive for the American currency and a drag on precious metals. Conversely, if the US Dollar Index breaks below the 77 level, it will usher in the anticipated rally in precious metals. So, in the near-term, we suggest that you keep a close eye on the US Dollar Index as movements over here will determine the fate of gold and silver.

In summary, if gold fails to reach new highs and on the contrary, if it breaks below US$920 per ounce, we urge you to liquidate your holdings in precious metals. Moreover, if the US Dollar Index breaks above the 80 level, we advise you to convert your cash reserves to the American currency.

This strategy may seem flippant to some of our readers but given all the uncertainty in the economy, we do not want to dismiss any possibility. More importantly, we want to ensure that we are prepared for all eventualities. Remember, Wall Street is littered with the graves of those who got married to one market forecast and failed to smell change. Instead, we prefer to be vigilant and will continue to adjust our investment positions based on market action

Gold versus paper. That's the real battle under the surface. This is the more important battle from a societal standpoint. Honest money or crooked money. Humans will always cheat, steal and lie, but when a system is set up specifically to promote cheating, stealing and lying, this is exactly what happens on a large scale. Though we were only on a quasi-Gold standard from 1934-1971 in the United States, it at least provided a modicum of restraint. Before 1933, we were on a fairly "pure" Gold standard for several decades.

Let me ask you an important question: do you think the United States was prosperous and grew like crazy as an economy on the whole from the 1880s thru 1971? Do you think that our rate of growth was too slow because we were on an archaic Gold standard?

Now, let's look at the period from 1971 through today. During this 40 year period, we had an inflationary decade that was the worst of the century for this country (the 1970s), we had rolling asset bubble manias and collapses in internet stocks and real estate, and now we are entering an economic depression that will last 10-25 years. Baby boomers have now had their life savings chopped in half (or more) in aggregate over the past decade and it's going to get worse for them if they don't get out of debt and get out of the stock market (which they won't, in aggregate, until we are near another stock market bottom and real estate has gone even lower). So, yes, a fiat system is great if you're a central banker or federal apparatchik looking to raise banking profits or expand the role of government, but not so good for the masses who sold themselves into paper debt slavery to the bankstas and still rely on the soon-to-be broken promises of government.

So don't tell me that we can't prosper as a nation on a Gold standard and don't tell me it's too restrictive and archaic for the modern world. It's bullshit and the people who say otherwise are either ignorant (the majority including most politicians) or nefarious (the central bankstas and some federal politicians). Despite my distaste for our current monetary system, I know that it is entrenched and it will take a major disaster (yes, worse than what we've already gone through) to get people seriously looking for a viable alternative.

So, it is a deflationary crash and depression for now, which will paradoxically increase the value of the U.S. Dollar despite it being backed by a bankrupt government. This increase, however, is a temporary respite from the terminal storms that await the U.S. Dollar in its current form. Though we may stay on a fiat system rather than turning to sanity initially, we certainly won't be staying on the system where the U.S. Dollar is the reserve currency of the world for the rest of our lives.

This is an important concept that Americans need to grasp to understand why Gold is so important as portfolio insurance and an international debt-free currency. Gold is money and this is why central bankers and governments own it and list it as a monetary reserve on their balance sheet. If Gold is not money, why do governments and central banksters own it and why don't they list it on their balance sheet with other assets like land? Why does government ignore its own definition of money and hoard the very form of money they ridicule and think is outdated? Do as we say, not as we do!

Gold is in a long-term bull market that has not ended. The value of Gold relative to other asset classes like stocks, corporate bonds, real estate and all international currencies is rising and will continue to do so at least until the Dow to Gold ratio reaches 2 (and possibly 1 or less). If cash is king during deflation, Gold is the best form of cash to own because cash unsecured by debt is more valuable than paper backed by promises. Also, keep in mind that trust in paper promises (i.e. those of government, bankstas and Wall Street) is breaking down. This is a social turning point that will force stocks back to a reasonable valuation (with a 12 month trailing PE ratio of greater than 120 on the S&P 500, we've got a long ways to go).

So, where are you going to put your money? Well, for the novice investor, you want to be out of stocks, out of corporate bonds, out of commodities and out of real estate. That doesn't leave many options. You're essentially left with cash and government debt (pick federal over municipal!). Where I am trying to help with this rant is by reminding people that Gold is cash and it is a better form of cash than the U.S. Dollar long term.

I actually think the U.S. Dollar is going to rise significantly from current levels over the next few months. I also think Gold is going to rise. For those who can only think in terms of "Dollar up, Gold down" and vice versa, this doesn't make sense. But for those who understand that Gold is an international currency that acts as a barometer of the health of all fiat currencies currently in existence, it makes perfect sense.
So, I don't know exactly when the Gold correction will end, but I do believe another buying opportunity lies ahead for patient investors. I also believe that Gold will break out to new highs and $1000/ounce will become the floor for the Gold price instead of the ceiling. All fiat currencies are sinking relative to true debt-free money.

Gold has tracked its seasonal pattern very closely this year, and indications are it reached a low during July. Traditionally, August is an excellent time to buy gold.

Author: David Levenstein
Posted:  Monday , 24 Aug 2009
JOHANNESBURG - 
Gold began the last week with considerable downside pressure as bearish news filtered through the markets. There was a massive short position from the bullion banks, JP Morgan and HSBC and a report from the World Gold Council. According to the report gold demand fell to a six-year low in the second quarter as recession curbed buying by jewelers and electronics producers. The report also stated that global consumption fell 8.6% to 719.5 metric tons from a year earlier. That's the lowest level since the first quarter of 2003. Jewellery demand declined 22% and electronics, the biggest industrial use for gold, slid 26%.  Rozanna Wozniak, investment research manager at the council said, "Tough economic conditions have impacted jewellery and industrial demand. Investment demand provided a cushion and we do expect that to continue."


In India, the largest buyer, gold demand fell 38% to 109 tons, while it rose 11% in China, the second-biggest buyer, to 89.6 tons, the World Gold Council said. Germany was the biggest investment market with demand of 28 tons, compared with 23 tons in the U.S. and 21 tons in India, the report said.

Gold is, however, turning out to be a major investment avenue for Indian investors. Despite high local prices, dollar volatility and fall in general demand for jewellery, retail investment demand for gold has seen a sharp upswing.

Retail investment demand in India returned to positive levels after seeing slack demand in the first quarter, but was nevertheless weak in comparison to the year-earlier totals. The demand for bars and coins was 21.0 tons compared to 48.1 tons recorded in Q2′08. Experts said despite the recent near record rupee prices, investor appetite and consumer affinity for gold remains healthy.

China's gold market exhibited a "unique resilience" according to the World Gold Council in the face of the pressures of the global economic recession. Mainland China's jewellery demand rose 6% year on year in the second quarter, the only major jewellery buying nation to record a positive rate of growth in volume, while investment demand remained relatively stable. Rozanna Wozniak, the WGC's investment research manager said, "China's cultural affinity to gold may not be quite as strong as it is in India, but gold ownership is nevertheless a key part of the wedding season, gifting season and process of wealth protection and accumulation," said Ms Wozniak.

The WGC said China could overtake India as the world's largest gold consumer within the next 10 years, or even as early as within the next five years. Gold only accounts for 2% of the total reserves held by China's central bank. If China's reserves continue to grow rapidly, more gold would be required just to maintain a constant proportion. It is no secret that China is the largest holder of US government bonds and more than once, they have expressed their concern about the value of the dollar. I believe that China will continue to diversify some of its reserves into gold.

While there are no guarantees that seasonal patterns recur every year, gold has tracked its seasonal pattern very closely this year, and I believe that it has made it's low during July. Traditionally, August is an excellent time to buy gold.

By the end of the week, we saw a drop in the value of the US dollar against the Euro, Nymex October oil jumped some US$7 from US$66 to US$74, and as to be expected gold shot upwards and at one point Dec gold touched $960.

Gold is forming a right-angled triangle with a resistance level at the US$960-US$965 level.  The seasonal lows during the July/August seem to have already occurred in July when it touched US$905 and I am now looking for a break above US$960 in the short-term. 

While I have never advocated switching your entire assets into gold or any other asset for that matter, gold is the ideal diversifier for a stock portfolio. Although the price of gold can be volatile in the short-term, gold has maintained its value over the long-term, serving as a hedge against the erosion of the purchasing power of paper money. Gold is an important part of a diversified investment portfolio because its price increases in response to events that erode the value of traditional paper investments like stocks and bonds.