Monday, October 17, 2011

How Gold & Stocks are About to Repeat the 2010 Bottom

In May of 2010, immediately following the flash crash many investors started to become bearish (nervous) regarding their position in gold and equities. Once the general public became aware that the stock market could fall 10% in a matter of minutes, investors became very cautious. Suddenly protecting their capital and current positions was at the forefront of their investment process.

A couple days later the market recovered most of its value, but it became clear that investors were going to sell their long positions if the market showed signs of weakness. It was this fear which pulled the market back down to the May lows and beyond over the next couple months which caused investors to panic and sell the majority of their positions. It is this strong wave of panic selling that triggers gold and stock prices to form intermediate bottoms. Emotional retail traders always seem to buy near the top and sell at the bottom which leads to further pain.

Now, fast forward to today…

This past August we saw another selloff similar to the “Flash Crash” in May of 2010. (I warned followers that gold was on the edge of topping and that stocks would take some time for form a base and bottom – Click Here To Read) Over the past couple months gold, silver, and stocks have been trying to bottom but have yet to do so.

Just a couple weeks ago we saw gold, silver, and equities make new multi-month lows. This has created a very negative outlook among investors which I highlighted in red on the chart below. Since the panic selling low was formed just recently we have seen money pile back into gold and stocks (more so stocks).

This strong bounce or rally which ever you would like to call it may be the beginning stages of a major bull leg higher which could last several months. Before that could happen, I am anticipating a market pullback which is highlighted with red arrows on the chart below.

Chart of SP500, Gold and Dollar Index Looking Back 18 Months

Gold Spot Newsletter

Reasons for gold and stocks to pullback:

  • Stocks are overbought and generally retracements of 50% or 61% are common following large rallies.
  • The dollar index looks ready to bounce which typically means lower gold and stock prices.
  • Gold continues to hold a bearish chart pattern pointing to lower prices still.

Weekly Trend Trading Ideas

A few weeks ago I warned my followers that stocks and gold are forming a bottom and that we should be on the lookout for further confirmation signs. I also mentioned that I was not trying to pick a bottom, rather that I was looking to go long once the odds were more in my favor.

This is a potentially very large opportunity unfolding and there will be several different ways to play this. However, right now I continue to wait for more confirming indicators and for more time to pass before getting subscribers and my own money involved.

From August until now (October 17) the SP500 is down -6.3% and gold is down -8.1%. Subscribers of my newsletter have pocketed over 35% in total gains using my simple low risk ETF trading alerts.

Chris Vermeulen

Derivatives: The $600 Trillion Time Bomb That's Set to Explode

Do you want to know the real reason banks aren't lending and the PIIGS have control of the barnyard in Europe?

It's because risk in the $600 trillion derivatives market isn't evening out. To the contrary, it's growing increasingly concentrated among a select few banks, especially here in the United States.

In 2009, five banks held 80% of derivatives in America. Now, just four banks hold a staggering 95.9% of U.S. derivatives, according to a recent report from the Office of the Currency Comptroller.

The four banks in question: JPMorgan Chase & Co. (NYSE: JPM), Citigroup Inc. (NYSE: C), Bank of America Corp. (NYSE: BAC) and Goldman Sachs Group Inc. (NYSE: GS).

Derivatives played a crucial role in bringing down the global economy, so you would think that the world's top policymakers would have reined these things in by now - but they haven't.

Instead of attacking the problem, regulators have let it spiral out of control, and the result is a $600 trillion time bomb called the derivatives market.

Think I'm exaggerating?

The notional value of the world's derivatives actually is estimated at more than $600 trillion. Notional value, of course, is the total value of a leveraged position's assets. This distinction is necessary because when you're talking about leveraged assets like options and derivatives, a little bit of money can control a disproportionately large position that may be as much as 5, 10, 30, or, in extreme cases, 100 times greater than investments that could be funded only in cash instruments.

The world's gross domestic product (GDP) is only about $65 trillion, or roughly 10.83% of the worldwide value of the global derivatives market, according to The Economist. So there is literally not enough money on the planet to backstop the banks trading these things if they run into trouble.

Compounding the problem is the fact that nobody even knows if the $600 trillion figure is accurate, because specialized derivatives vehicles like the credit default swaps that are now roiling Europe remain largely unregulated and unaccounted for.


To be fair, the Bank for International Settlements (BIS) estimated the net notional value of uncollateralized derivatives risks is between $2 trillion and $8 trillion, which is still a staggering amount of money and well beyond the billions being talked about in Europe.

Imagine the fallout from a $600 trillion explosion if several banks went down at once. It would eclipse the collapse of Lehman Brothers in no uncertain terms.

A governmental default would panic already anxious investors, causing a run on several major European banks in an effort to recover their deposits. That would, in turn, cause several banks to literally run out of money and declare bankruptcy.

Short-term borrowing costs would skyrocket and liquidity would evaporate. That would cause a ricochet across the Atlantic as the institutions themselves then panic and try to recover their own capital by withdrawing liquidity by any means possible.

And that's why banks are hoarding cash instead of lending it.

The major banks know there is no way they can collateralize the potential daisy chain failure that Greece represents. So they're doing everything they can to stockpile cash and keep their trading under wraps and away from public scrutiny.

What really scares me, though, is that the banks

think this is an acceptable risk because the odds of a default are allegedly smaller than one in 10,000.

But haven't we heard that before?

Although American banks have limited their exposure to Greece, they have loaned hundreds of billions of dollars to European banks and European governments that may not be capable of paying them back.

According to the Bank of International Settlements, U.S. banks have loaned only $60.5 billion to banks in Greece, Ireland, Portugal, Spain and Italy - the countries most at risk of default. But they've lent $275.8 billion to French and German banks.

And undoubtedly bet trillions on the same debt.

There are three key takeaways here:

  • There is not enough capital on hand to cover the possible losses associated with the default of a single counterparty - JPMorgan Chase & Co. (NYSE: JPM), BNP Paribas SA (PINK: BNPQY) or the National Bank of Greece (NYSE ADR: NBG) for example - let alone multiple failures.
  • That means banks with large derivatives exposure have to risk even more money to generate the incremental returns needed to cover the bets they've already made.
  • And the fact that Wall Street believes it has the risks under control practically guarantees that it doesn't.
Seems to me that the world's central bankers and politicians should be less concerned about stimulating "demand" and more concerned about fixing derivatives before this $600 trillion time bomb goes off.

Your Next Bank Stock to Sell: Citigroup (C) reversed into a bear channel and is likely to test support

Citigroup (NYSE:C) — This diversified financial services company provides a wide range of products to retail and corporate clients in more than 100 countries.

Although S&P believes that Citigroup made “significant progress in improving credit quality” and they target the stock at $50 within 12 months, technically it has reversed into a bear channel with the likelihood that it will test the support line of the channel at $23. Note the close under its 50-day moving average and a curl down of the fast line of the stochastic (red line).

Sell C if you own it. Short it if you are looking for a trade.

Trade of the Day – Citigroup (NYSE:C)

Finews interviews James Turk

James Turk James, after gold has fallen 15 per cent in three days, many people say, gold as lost its safe haven status. True?

No, it is not true. First of all, the price of just about every other asset also fell, so gold was no different in this regard. More importantly, gold is a tangible asset, so it does not have any counterparty risk. It is this attribute that makes gold the best safe haven.

What makes gold so volatile lately?

It is not only gold that is volatile. For example, the VIX Index, which is a measure of volatility of US stock markets, tripled over the past couple of months. Everything is volatile because the financial system is breaking apart. To explain this point, picture in your mind a spinning top. As it slows down, there are often some huge wobbles before it rights itself, and then eventually falls over. The volatility we are seeing now is those wobbles. I expect another bank collapse like Lehman before the end of the year. That is when the top will fall over.

Some people say gold is now close to a bubble that might burst soon. It is the end of a decade-long bull run. What do you think about this opinion?

Many people said the same thing about the Dow Jones Industrial Average in 1984 after it moved above 1,000, which was a level that had not been broken for 16 years. They obviously were wrong because they looked at the DJIA’s price, rather than what they should have been looking at, which is its value. All my measures suggest that gold remains undervalued. Its price has risen only because national currencies are being debased, which is causing them to lose purchasing power.

Technical analysts have been predicting gold prices quite correctly, also the fall a few weeks ago. How important is technical analysis for you and your estimate?

It is not too important. There are two things upon which one needs to focus – value and strategy. Gold is undervalued, so it should be accumulated, which brings up the second point. Everyone’s strategy should be one of buying gold on a regular basis as part of a cost-averaging accumulation program. Gold is money, so view the gold you are accumulating in this way as your savings.

Where will the gold price be by the end of this year and by the end of 2012?

Probably higher. Even though gold had a setback in price lately, I expect gold to be over $2,000 before too long. If it doesn’t happen in 2011, it will surely happen in 2012.

Some currencies like the Swiss franc and the Yen have also lost its value as a safe haven. Is that comparable to the gold price?

No, it is not. These currencies lost their safe haven value because of central bank actions. Central bank policies determine the value of national currencies. The value of gold is determined by the free-market, or in other words, by the countless millions of people who understand gold’s enduring usefulness.

How would you describe the risk of owning gold?

Gold is just like very other asset in this regard. You want to accumulate it when it is undervalued, and sell it when it is overvalued. If you know how to value any asset, the risks of owning it can be controlled.

What are the fundamentals that gold owners have to look after?

It’s simple really. People only have to ask themselves two questions. Are central banks are doing a good job? Whose interests are central banks are serving, the general population or conversely, banks and the government. Clearly, central banks today are not doing a good job, and given their willingness to bailout bad banks with taxpayer money, they are not serving the interest of most people. Therefore, and given the fact that gold remains undervalued, everyone should be accumulating gold.

Technically Precious With Merv For Week Ending 14 October 2011

In the “good old days” gold would move $10 and that was something, now it moves $50 and it’s ho-hum. Although moving higher slowly it really is not going anywhere and unfortunately looks like it just might stumble.



Gold continues to hold on to its bullish long term rating but only just so. The next stumble in the price just might take gold into the bearish camp but that’s for tomorrow, let’s look at today.

Trend: The recent gold action remains just above its positive sloping long term moving average and above the first FAN trend line. As it now looks, a close at or below the $1580 level just might turn everything to the negative.

Strength: The action over the past couple of weeks has not been all that strong. The long term momentum indicator has been tracking an almost horizontal path although still in its positive zone.

Volume: Although the price has been moving very slowly in an upward direction the volume indicator has been stalemated and is moving in a horizontal path. It is below its trigger line and the trigger has turned to the down side.

As of the Friday close the long term rating remains BULLISH.


Trend: The recent price action remains below its negative sloping intermediate term moving average line.

Strength: The intermediate term momentum indicator has been hugging its neutral line for the past couple of weeks. The Friday close has seen the indicator slightly above the neutral line in the positive zone and slightly above a positive trigger line.

Volume: As with the long term volume indicator what we have here is a stalemated indicator tracking below its negative sloping trigger line.

At the Friday close the intermediate term rating can be classified as a – NEUTRAL rating due to the barely positive momentum. The short term moving average line remains below the intermediate term line confirming that a reversal to the bull has not yet occurred.


The short term is the real interesting time period to watch. Some interesting stuff here.

Trend: First the obvious. The price has been above its short term moving average line all week and the line has turned upward. As the chart shows, the move during the week has not been that aggressive. What we ended up with is a pattern that suggests another move ahead, to the down side. These upward sloping wedge patterns, after a price decline, are just a rest period for the price before it continues on its previous path. That would be to the down side. Now, some texts suggest that we often get these continuation patterns in a mid-way of a trend. This would suggest a move to somewhere about the $1200 level depending upon where you start the move from. I have been suggesting for some weeks now that I see the price breaking through that long term FAN trend line (shown) and now we have a second pattern that suggests the same.

Strength: The short term momentum indicator has been rising steadily over the past few weeks and remains above its positive sloping trigger line but still slightly inside its negative zone. Although trending positively it is not showing much strength behind the price move.

Volume: As one can see from the chart the daily volume activity remains very low and continues to be below its 15 day average volume. This is not encouraging during an upward trending price action.

At the Friday close although the momentum indicator is still very slightly in its negative zone the overall short term rating is BULLISH. The very short term moving average line is above the short term line confirming this bull.

As for the immediate direction of least resistance, although the price is trending higher, above the very short term moving average line and the Stochastic Oscillator is also trending upwards in its positive zone I will go with the down side over the next day or two. This is primarily due to that upward sloping wedge. The break below the wedge pattern very often occurs at its two thirds point along the wedge, where it is right now so it has to break on the down side or the message of the wedge pattern would be nullified.


Although the “box” pattern that we I had shown last week is still there (for gold also) by the end of this past week we have another pattern showing up. Similar to the gold wedge, we have here more of a triangular pattern but the prognosis is the same. This is considered a continuation pattern with the break expected to be to the down side. The price is just about past the point when a break is expected so it should come on Monday or the latest, Tuesday or else it just may not come. A general thinking is that the break should come at the two thirds point from the start of the pattern to the apex. The closer the break gets to the apex after that the weaker the break is expected to be. Just some thoughts.

LONG TERM: Nothing has changed from last week. Everything is still negative and the rating, at the Friday close, is still BEARISH.

INTERMEDIATE TERM: Nothing in the chart or indicators has changed from last week and the rating, on the Friday close, still remains BEARISH.


Trend: Silver crossed above its short term moving average on Monday and had stayed above all week. The moving average itself has now turned to the up side.

Strength: The short term momentum indicator continues to move higher above its positive sloping trigger line but is still in its negative zone.

Volume: The daily volume action remains low, too low to give us any confidence that the positive move will last any length of time.

At the Friday close the short term rating is BULLISH. This is further confirmed by the very short term moving average line having moved above the short term line.

As for the immediate direction of least resistance, for the same reasons mentioned in the gold section I am going with the down side for the next day or two.

Merv’s Non-Edibles Futures Indices Table

For weekly commentary and analysis of gold and silver Indices and 190 gold and silver stocks please go to the subscribers section at

Well, that’s it for this week. Comments are always welcome and should be addressed to

Merv Burak, CMT

David Morgan: Gold and Silver Interview with Max Keiser

When Money Dies, Some Will Prosper

“When the currency system as we know it dies, some people will become very wealthy,” begins a special report from the Casey Research/Sprott Inc. Summit, When Money Dies. It’s an attention-getting lede sentence, and a sentiment that will sound quite familiar to readers of and the writings of Michael Maloney, who was a presenter at the Casey Research Summit held earlier this month in Phoenix.

The report transcribes a roundtable discussion between Rick Rule, founder and chairman of brokerage firm Global Resource Investments, and two Casey Research editors, Louis James and Marin Katusa.

Asked by the moderator “who killed money,” Rule replies:

The answer is in an old Pogo Cartoon that reads: "I have seen the enemy and he is us." Collectively in the West, we have lived beyond our means for a substantial amount of time. We rely on a government that we have paid to steal from our neighbors. Money is how we deal with transfers. Dealing with transfers dishonestly by making more of the medium that isn't backed by any value is the process by which money dies.

But even though, as Rule continues, “It is likely that the purchasing power of Western currencies will lose 5%–7% compounded for a long while, maybe until they go extinct,” opportunities to build and preserve wealth still exist. Says James:

Tremendous money creation is going on. This has economic consequences. The guy at the supermarket can see it even if his house is worth less. It is the worst of all possible models. Necessities cost more, but once trusted assets—the store of wealth in real estate and pensions—are depreciating. This has investment and economic consequences. The government is creating all this money and blowing it out the window. You have to figure out where to stand with a net.

But how do you know where to put your net? the moderator asks. James replies:

It's all about stuff. Stuff people need is, in general, good when paper or theoretical money is bad. In certain asset classes, including real stuff, there will be price destruction. Real estate, for instance, still has a speculative side to it and has not yet bottomed. But fundamentally, real stuff that has value can't just blow away. The world will go forward. People will need food and raw materials. Gold is another vehicle with intrinsic value. These things can't be inflated out of existence. When prices on valuable stuff goes down ridiculously, that should be seen as a godsend. People will still need copper, steel and timber. Buy when that stuff is priced low and wait for it to go high, then sell.

As Michael Maloney wrote in his 2008 book, Guide to Investing in Gold and Silver, and again more than a year ago in the article, True Value Is Priceless, the only way to determine the true value of a thing is to measure it against something of intrinsic value. Paper currency is dying because it has no intrinsic value beyond the paper it is printed on. Its value is an illusion, based on nothing more than how much governments and central banks determine it is worth—and they continually reduce its value by continually increasing the currency supply. As Mike writes:

Don’t use price, i.e. the dollar, to measure value. The dollar, and any fiat currency, lies. Again quoting from my book, Guide to Investing in Gold and Silver, “…the dollar is simply a smoke screen that obscures true value, and that allows the Fed to legally steal from your back pocket while patting you on the shoulder and telling you they'll make everything all right.”
The true measure of the value of an asset, such as gold, is how much of that asset it takes to obtain the things you want—a house, a new car, a loaf of bread.
When people ask me how high I think the price of gold or silver will go, they’re asking the wrong question. The question to ask is how much of things of value—food or houses—will an ounce of gold or silver be able to buy…. [G]old and silver are vastly outperforming the dollar. They will only continue to rise in value as stocks, real estate and currency continue to fall.

Once the world’s population wakes up to the way in which its wealth is being stolen by the constant devaluation of the global currency system, that is when the world will turn en masse to the currency it turns to every time fiat currencies die—gold and silver. Those who “will become very wealthy” will be those who are positioned on the right side of the enormous wealth transfer that will ensue.

Is This Market Running Out of Steam?

Low volume and a lack of consistent leadership led to another day of mixed results. The financial sector took back almost all of Wednesday’s gains. Had it not been for strength in the technology sector, there would have been broad losses.

The NYSE again failed to trade over 1 billion shares, with just 898 million shares traded, while the Nasdaq crossed just 457 million shares. Decliners were ahead of advancers on the Big Board by 1.5-to-1 while the Nasdaq was a break-even.

SPX Chart

Trade of the Day Chart Key

The S&P 500 failed to penetrate its immediate resistance at 1,220, continuing the reversal down that began in the last 90 minutes of trading on Wednesday. Its next support is the 50-day moving average at 1,172. The longer the index remains below a significant point of resistance, the more significant the line becomes. Note that as it lingers, the stochastic’s fast line (red) is beginning to arch over — not an encouraging sign for the bulls.

XLF Chart

Trade of the Day Chart Key

Disappointing earnings from JPMorgan Chase (NYSE:JPM) before the opening yesterday led to a rough day for the financial stocks. The Financial Select Sector SPDR (NYSE:XLF) not only reversed from resistance at $13, but closed below its 50-day moving average at $12.50. The financial sector has been a drag on the broad market for months, and many analysts hoped that Q4 would start with strong earnings for JPM. Instead it looks like more of the same for both the group and the market.

QQQ Chart

Trade of the Day Chart Key

Despite Research In Motion’s (NASDAQ:RIMM) umpteenth “disruption in service” and its subsequent fall from grace, the technology sector performed well yesterday. Much of the gain was due to a run on Google (NASDAQ:GOOG), up over 6% in anticipation of a strong earnings report after the close. Google reported $9.72 versus average estimates of $8.74.

The PowerShares QQQ (NASDAQ:QQQ), which consists primarily of technology issues, was strong yesterday, but failed to break the September high at $57.35. Note the declining volume of this important ETF. Unless volume improves, it is unlikely that it will be able to make a clean break and have enough pulling power to draw the broad market along with it.

Conclusion: Technology stocks minus financial stocks, equals no gain. The likelihood of no more than a sideways move for the broad market is increasing. But that doesn’t mean you can’t make money.

US Weekly Economic Calendar

DateTime (ET)StatisticForActualBriefing ForecastMarket ExpectsPriorRevised From
Oct 178:30 AMEmpire ManufacturingOct--5.0-4.0-8.82-
Oct 179:15 AMIndustrial ProductionSep-0.1%0.2%0.2%-
Oct 179:15 AMCapacity UtilizationSep-77.5%77.5%77.4%-
Oct 188:30 AMPPISep-0.3%0.2%0.0%-
Oct 188:30 AMCore PPISep-0.1%0.1%0.1%-
Oct 189:00 AMNet Long-Term TIC FlowsAug-NANA$9.5B-
Oct 1810:00 AMNAHB Housing Market IndexOct-141414-
Oct 197:00 AMMBA Mortgage Index10/15-NANA+1.3%-
Oct 198:30 AMCPISep-0.3%0.3%0.4%-
Oct 198:30 AMCore CPISep-0.2%0.2%0.2%-
Oct 198:30 AMHousing StartsSep-575k595k571K-
Oct 198:30 AMBuilding PermitsSep-600k610k620K-
Oct 1910:30 AMCrude Inventories10/15-NANA1.344M-
Oct 192:00 PMFed's Beige BookOct-----
Oct 208:30 AMInitial Claims10/15-400k404k404K-
Oct 208:30 AMContinuing Claims10/08-3700k3690k3670K-
Oct 2010:00 AMExisting Home SalesSep-5.10M4.94M5.03M-
Oct 2010:00 AMPhiladelphia FedOct--5.0-9.6-17.5-
Oct 2010:00 AMLeading IndicatorsSep-0.3%0.3%0.3%-