Gold Warning Comes True

September 12, 2008 | By | Reply More

Just a few weeks ago one of our regular correspondents gave me a warning that gold was going to tank and would fall back to $750 an ounce or thereabouts.

As he is a technical guru, he kindly explained in detail how he interpreted the charts to reach this conclusion. Regular visitors will know that I am not a believer in technical analysis except possibly in the very short term when I succumb to the instinct to gamble.

Even then it is simple, candlesticks, momentum and moving averages give me my signals and I never stay in these trades more than a few hours at the most.

In my reply I arrogantly pointed out that such were the overwhelming fundamental criteria that there was nowhere else for gold to go but up.

Essentially those arguments have not changed.

Oil is still over $100 a barrel, the US economy continues to falter and simple logic dictates that the present strength of the US dollar against all but sterling and arguably the euro is a passing phase.

Physical gold and silver remain short, mining production continues to slide and some miners may find that the increased cost of production will not be covered if the price of the metals falls much further. Some mines will close, exploration and development will grind to a halt resulting in even lower output.

These and many more familiar arguments remain in place to justify a bullish outlook for the yellow metal, but, and it is a big but, what do the charts tell us.

David, if you read this please enlighten me so that I can pass on your analysis and conclusions to our readers.

Before I leave you, I must pass on an interesting observation I came across today. We have mentioned conspiracy theories concerning manipulation of the gold market previously so here we go again.

The US government continues to add to its fiscal liabilities on a daily basis, trumping the toxic mortgage bailout of the banks with the nationalization of Fannie and Freddie. Lest we need reminding these two are likely to continue to drain the coffers as they add to the growing liabilities of Uncle Sam.

The theory expounds the idea that the US government has persuaded central banks worldwide to buy up loads of dollars, hence its current strength, and talk down and maybe sell gold and silver.

Silver is the theorists favorite as it is a tiny market compared to gold and the gold to silver ratio is a basic barometer for professional dealers in the gold and silver market.

If the ratio goes out of perceived whack, then dealers are quick to trade to restore the preferred ratio. In this scenario if silver is sold down, then gold is expected to follow.

As many central banks are holders of vast quantities of dollars, while the EEC and UK central banks are happy to see their currencies weaken in the hope their exports will be cheaper and thus prosper, it would be surprising if they did not cooperate with the US.

Historically the ratio has been in the order of 15 to 1 but has stood as high as 80 to 1 in the early nineties before returning to circa 50 to 1. Today the ratio stands at 69 to 1.

In simple terms this means that silver has sold down percentage wise more than gold. The average ratio for the last ten years has been 59.66. To restore this average gold will have to drop more percentage wise than silver, alternatively silver would have to considerably out pace the rise in gold.

If the historical average of 15 to 1 were ever to be achieved again, silver would have to stand over $100 an ounce if gold stays around its present level.

The conception that the world is facing hard times and thus the price of many commodities in industrial use will suffer a slow down in demand, such as silver, provides a perfectly reasonable excuse for the white metal to be sold down with the expectation that gold will follow suit allowing the dollar to be considered as an alternative store of value.

Some hopes, anyhow it is only a theory after all! 

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