[e-gold-list] gold pennants fly again

[Jim Davidson]

Dear Friends,

Gold seems to be flying pennants over and over again. Take
a look at Kitco's chart on the last five years.  This chart
uses a linear scale, so the pennants are dead obvious, and
JP doesn't have to complain about log axes.

http://www.kitco.com/LFgif/au1825nyb.gif

We all remember how gold sailed up, nearly vertical, in April
2006.  It peaked in May 2006, and slammed back down, to form
a pennant around the $600 per ounce price.  A nice clear
Summer doldrums formation.  In the Autumn of 2006, gold picked
itself up, dusted itself off (gold dust metaphor here), and
sailed up to $700 in early 2007.

And formed another pennant, this time with the tip flapping at
$650 per ounce.  Essentially, the Summer doldrums started early
in 2007, and gold did not set any new records until the Autumn.
Arguably, the pennant that I'm seeing pointed at $650 was just
a continuation of a broader pennant with the flagpole back in
May 2006.

In Autumn 2007, gold began breaking records again, and sailed
up to $842 or so, and formed yet another pennant.  This pennant
was a very tight formation, which JP dubs "Patrick's Pennant"
and, as Jim Turk writes on his GoldMoney commentary, a tight
pennant is a bullish indicator.  That particular pennant's tip
points right at $800 per ounce.

Earlier this month, gold formed a new high at $913, which in
nominal dollars per ounce troy is the all-time high in world
history.  And, since the 15th of January 2008, gold is down,
and, in my view, very likely forming yet another pennant.

What is with all these pennants?  Well, there are two ways of
looking at it.  The interventionist model, popular with Gold
Anti-Trust Action enthusiasts such as Ed Steer, is that the
downward pressure on gold represents official government gold
sales, within or outside of established agreements, presumably
to dissuade people from believing that inflation is huge,
anthropogenic, and problematic.  Under this theory, real gold
from central bank reserves, or paper gold with no potential for
actual delivery, is being sold on the spot market to keep the
price down.  And, I gather, under this theory, reporting on
how much gold the various central banks and national governments
have is being mis-reported, with "deep storage" gold being
substituted for good delivery bars.

So, with all this gold, and all this power to pervert the markets,
why aren't the central banks and the government winning?  I
believe the answer is that there continues to be tremendous demand
for gold as money, owing to increasingly widespread concern
about the economy.  For example, over in Europe, this chart
was recently published, along with analysis, at europe2020.org.
http://www.europe2020.org/IMG/jpg/Concentration_of_Commercial_Bank_Derivatives_30-09-2007.jpg

They seem to think that there is some difficulty implicit in having
$155 trillion of notional-value derivatives held by the top seven
commercial financial institutions in the USA.  Certainly, that seems
unhealthy compared to the other $3 trillion of assets held amongst
another 929 banks.

Of conceivably greater importance, the assets of major banks like
Citigroup are being written down in the billions of dollars. And
major banks are posting major losses as the subprime mortgages
blight their spreadsheets.  Domestic loan volume is headed up,
and USA banks are seeing deposits way, way down.
 http://www.europe2020.org/IMG/jpg/Quarterly_Change_in_Domestic_Loans_vs_Domestic_Deposits_1998-2007.jpg

Now, I'm not going to shed a tear for any banker who goes
out of business.  I consider them all to be the worst sort
of toadying creeps, using a license to print money, and thus
steal from others using the mechanism of monetary inflation.
But, bank runs and bank failures are coming, so gold and silver
are popular.  There is a vast underlying, unmet demand for gold
and silver which keeps pushing the price up, month after month,
year after year.

But, I wrote that there were two ways of looking at it, and
there are.  The second way to look at it denies the market
interventions as effecting manipulation, which Craig Spencer
suggests isn't even possible.  In this scenario, entities with
large gold holdings are simply liquidating their assets at
higher and higher prices.  Presumably they are investing in
other assets, such as platinum.  Or technology stocks.

Why do they have a lot of gold?  Well, perhaps they stole it
over the years, during the vast expeditions to loot China and
east Asia from 1895 to 1945.  Perhaps they have stolen gold
from Americans, as FDR's administration did in 1933, a tradition
which carried on for another 40 years through the early part of
the Ford administration.  Or perhaps they have the gold from
some quasi-legitimate means, such as licensed banking operations,
which is legitimate only in the sense that licenses might be
granted to steal, as Ian Fleming would have us suppose they are
granted to kill.  That is to say, not legitimate in any natural
law sense of the term.

Platinum certainly seems to be getting more expensive, in a
nice five year channel seen here:
http://www.kitco.com/LFgif/pt1825nys.gif

A five year chart on QQQQ which tracks the NASDAQ 100 is
here:
 http://chart.finance.yahoo.com/c/5y/q/qqqq
And shows a nice long term up trend.  Oh, it is down a bit
this month.  Can't really sell technology to people who
are losing their homes.

So, what should we expect for gold this year?  I expect gold
is going to set new records in nominal dollars, to $1500 or
$2000 by the end of 2008.  It might even exceed expectations
and make new highs in inflation-adjusted dollars which,
depending on how much you were willing to believe the lies
published by government about inflation, would be anywhere
from $2160 to $2500.

Of course, this expectation is basically made ceteris
parebus, all other things being equal.  But, other things are,
frankly, going to perdition in a badly woven hand basket. As
the housing crisis and mortgage crisis and banking crisis
continues to spiral out of control, Fed chairman Bernanke
promises to print more and more and more money.  So, the
nominal dollar value of gold is going to go up.

Given that I expect gold could reach $10,000 an ounce in
the next two or three years, with a stock market not more
than 3 ounces of gold, and possibly one ounce to buy the
Dow Jones Industrials, what should you do, now?

Well, I think it would be wise to regard the current dip below
$900 an ounce as a buying opportunity.  People who bought in
previous pennant formations at $550 in February 2006, or at
$600 in September 2006, or at $650 in June 2007, or at $800
in December 2007 are likely glad they did so.

I do not believe we should expect prices like $550, $600,
$650, or $800 per ounce troy for gold any time in the
foreseeable future, given where the dollar is headed.  Which
means that gold below $900 is probably a good value right now.

If you believe that gold at $880 is a good value this year,
then you should also believe that silver at $15.80 per ounce
troy is also a good value.  So, if you find gold at $880 to
be expensive, given your means, you might do well to invest
in silver.  It currently takes over 55 ounces of silver to
buy one of gold.  In the past, when gold and silver prices
were spiking, the ratio in their prices has tended to fall,
approaching values like 17 ounces silver to buy one of gold
near the peak in January 1980.  If that happens again, then
now is a good time to buy silver, as well.  The same ounces of
silver you buy now are going to buy more gold as we near the
peak.

Would you be wise to hold other currencies, instead?  You
can get currency accounts from my friend Frank Trotter over
at Everbank.com.  They'll happily convert your USA dollars to
Canadian dollars, to Swiss francs, to British pounds, or to
EU euros.  And, such diversification might be wise.

But, I'll tell you, I think very highly of the analysis that
Doug Casey has made on these matters.  The USA dollar is an
I owe you nothing.  It is redeemable only for other paper
dollars, or pot metal coins made of brass, cheap steel, or
zinc.  It happens that the penny and nickel coins are worth
more as metal than they are at face value - so of course there
is a recent ruling making it illegal to export them or melt
them down for their bullion content.

But, as Doug points out, the European Union euro is a "who
owes you nothing" because there are so many different central
banks issuing euros, and so many governments involved, they
can "pass the buck" of responsibility indefinitely.  There's
no way of knowing whether inflation in France or Germany is
going to be brought under control, but given the power of the
labor unions in those places, the way to bet is "probably not."
And there is no reason to suppose that Ireland or Estonia or
Spain are better off as euro-based economies, enjoying the
inflation imposed by the deficit spending and bad monetary,
fiscal, and trade policies of Italy, France, and Germany. It
appears, to me, like a fairy ring of exceptionally perverse
screwing, beggaring of neighbors, and whoever is holding
euros at the end of the day is going to be less happy than he
was last year.

Doug also has noted that Canada's central bank sold all of
their gold reserves.  So, the Canada dollar is backed by
reserves of the USA dollar.  If their war policy, trade policy,
and fiscal policies are less inflationary, this year, than
those of the USA, that's certainly no guarantee that the
Canada dollar is going to hold its value.

Has it escaped your notice that the Swiss franc is no longer
convertible to Swiss gold?  Well, it is not.  The voters there,
in their wisdom, have opted join the rest of the world in
repudiating gold.

And is England going to founder on its Northern Rock?  Perhaps
not, but there is still plenty of systemic risk in their
banking sector.  I would not be confident holding British
pounds for very long.

So, gold and silver coins are good values, right now.  And,
you are probably better off buying them for physical delivery
into your hot little hands, until you have a hundred or more
ounces of gold and a few hundred ounces of silver in your
actual direct control.  I would not encourage you to put them
in bank safety deposit boxes, because it is the safety of the
bank, not your assets, that is protected - as we saw after
the gold confiscations began in 1933.

If you have difficulty with gold and silver in your physical
possession, if you have been denied effective tools for self
defense in your jurisdiction, you may want to consider gold
and silver in digital form.  Digital warehouse receipts for
gold and silver are available from many different vendors,
such as e-gold, GoldMoney, Phoenix dollar, Pecunix, and c-gold
(all dot com), stored in a stunning array of foreign countries,
and in the USA.  So, diversify your risk accordingly.

Regards,

Jim
http://vertoro.com/  -> where you can find gold and silver



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