Louis James: Ladies and gentleman, thanks for tuning in. We’re at the Casey Research Recovery Reality Check Summit. We’re talking with John Hathaway, one of the more successful fund investors – institutional investors – in our precious metals field near and dear to my heart. John, can you give us a quick version of what you talked about here, for those who didn’t make it to the conference?

John Hathaway: Sure, yes. I think we’re at the end of a correction that resulted from the peak last summer. It was overcooked, kind of hyperventilated hysteria over the debt-ceiling talks, the rating downgrade of the US sovereign debt, and I think basically the stocks and the metal had been working off that boiled down to what we now have is a simmer. I think we are at a position where there’s not a lot of downside, and I would not be surprised by revisiting the previous highs of $1,900 and maybe even new highs over $2,000 this year.

What will do that is basically – so much of the narrative has been quantitative easing. When Bernanke announced on the 29^th of February that they were done with quantitative easing (and if you believe that I’ve got a bridge to sell you, but for the time being let’s assume that there won’t be any), I was very impressed that gold did not go to a new low. It printed somewhere below $1,600 at the end of the year, made a couple-of-day swoon, but it didn’t go to a new low. And then when the Fed minutes came out it also did not go to a new low, it kind of reiterated what Bernanke said. So the narrative may be changing. I’m not ruling out quantitative easing as a possibility, but there are things out there that gold might be looking at that the CNBC mentality hasn’t figured out.

Remember that gold rose for many years before we even heard of quantitative easing; it was in a steady uptrend. So what could those things be? What would take gold – what would be the new headlines that might take gold to higher highs? To me, the biggest thing is that the Federal Reserve has purchased something like 61% of all new Treasury debt in the last year; and if they aren’t going to continue that, then what’s going to happen to rates?

Louis: Right.

John: The Chinese – who had been big supporters because they were rigging their currency – have not been generating foreign exchange to anything like the extent they were, so their participation rate in Treasury auctions has gone way down. If you look up the TIC numbers, foreign buying of Treasuries has dropped precipitously, so you have the two biggest pillars of support for keeping rates low in question here, and let’s see what happens on June 30^th. If you don’t have a political buyer, either the Chinese and foreign buyers who are manipulating currency, and the Fed because they said they aren’t going to do it, what are rates going to do?

If you are going to get a risk-free return inflation-adjusted today that’s not politically motivated, it’s got to be somewhere around 4-5% on the short end of the curve. Every hundred basis points adds a huge amount to the budget deficit, so to me we’re in a real trap here, where it’s going to be a game of chicken as to whether the Fed can really live up to what Bernanke said on the 29^th.

Louis: Isn’t that really the bottom line? They can’t allow that interest rate to rise with the debt outstanding –

John: It seems very difficult. The recovery, the alleged recovery that we had, is very… I’ll grant that things are better than they were a year ago or two years ago, but you’d have to call it feeble at best and maybe not sustainable. That’s one thing that I think could affect the gold market.

The second thing, and I think it’s very important too, is that inflation is rising. Even though the economy is soft, the number I look at – and I know we’re going to have John Williams speak at lunch, and we know he has a very good take on it – is the MIT Inflation Index, because that’s real-time pricing of billions of products. You can get to that website just by googling “MIT Inflation Project”; and that does not include services. Most of the services I take are inflating at more than 5%; they are closer to 10%. But goods that could be measured in real time are rising at 5%, so that’s also going to be a factor. That means if rates stay where they are, the Feds are just going to be that much more behind the curve.

So those are two things; and the third thing is that there’s $1.5 trillion of liquidity in the system that should the recovery – and I’m not a macro forecaster, but let’s say the recovery does sustain itself – you’ve got $1.5 trillion of free reserves that could just turn into money supply. Then you really would have a potentially hyperinflationary scenario, and the Fed would be completely powerless to do anything about it. So I think that’s bullish for gold – gold is not backward looking, it basically looks forward. I can go on and on. You’ve got the European unresolved sovereign debt crisis in Europe.

Louis: Let me jump in with a question about this, then. You’ve stood out really from the crowd in that most people agree on the general prognosis for gold. Most people are sort of near-term bearish, you know, the ones –

John: It makes me so happy.

Louis: [Laughs] But, you know, once a bear sentiment sets in, it seems to almost have its own momentum.

John: Yes.

Louis: You’re the only who’s saying “I think we’re near the bottom.” Most people are saying, “Sell in May and go away” –

John: Yes, I heard a couple of things from this session that just made me want to jump up and buy –

Louis: I understand the contrarian reason for that, but can you tell our audience a couple of reasons why you think we might be near the bottom or why you’re ready to buy now and not waiting to see how this summer turns out?

John: Sure. Well, first of all, I’m not a trader. I mean, I’m long, and last summer I thought, “Gee, this is really a little spooky, we’re not at a sustainable level,” but there wasn’t a whole lot I could do about it. And here we are and we have some cash, we have some inflows, so we are able to put money to work. And what is it that makes me think we’re there? Sentiment numbers are extremely negative, historically, when they’ve gotten to these levels. By the way, I put out a quarterly newsletter now that has a lot of this data, which can be found on our website.

Louis: Go ahead and give us the website.

John: It’s the Tocqueville Asset Management website, and it should be fairly easy to find. So sentiment is at levels that have been associated with big rallies. Traders’ commitments, net longs, net spec longs are way, way down there. I look at that a lot just as a way to see where the market is positioned. The guys who can create some volatility are not there, and so if gold starts moving, they won’t want to miss it, and so they’ll come in. And then, we’ve looked at some technical stuff. I’m not a technician but most of what I see from a technical perspective is extremely constructive. So I put those things together.

Sentiment is rock bottom. COMEX traders’ commitments are very, very constructive, and technical things that we look at are very constructive. So I would say all of those things, plus hearing these guys say that they are not going to step in – that’s more anecdotal, but that to me is just very, very positive. So I – frankly I don’t stake my reputation the way that Dennis Gartman does on making trading calls, but just as an experienced observer of this market for some number of years now, I think we’re ready to make a move higher.

Louis: Okay, well, thank you very much. Word to the wise.

John: Thank you.

[This interview was done at Casey Research's Recovery Reality Check Summit – recordings can be obtained by ordering the Summit Audio Collection today. Every presentation, every chart and graph, and every actionable investment tip can be yours, in either the instantly available MP3 files, or in CD format.]

Readers may remember our recent series on Safe Havens. Some of what we discussed there involved some pretty challenging scenarios. We mentioned that we expected the markets to tank and metals to go up at the beginning of a financial crash that could spell deflation.

Today some asked if this might be the beginning of that cycle. I sincerely doubt it. Though metals had another great day and the markets struggled (in spite of the facebook IPO), this seems too early for several reasons.

Europe is beginning its rapid descent. Where it stops, we can’t know. But the signs of trouble are infiltrating all European countries, even those not in the euro. There was discussion about England closing its borders on fears of too many fleeing France in light of the socialist plans of Hollande. Cash is fleeing to England, Germany and other countries, from Greece, Italy, Spain and France. While these events are hard on Europe, they offer the U.S. a short-term boost as some of the wealth comes to our economy as well.

Also, things just aren’t that bad yet. Don’t get me wrong. If you’ve been reading long here, you’ll know that we expect the economy to tank hard because things are so incredibly wrong; irretrievably wrong. But the setup needs some euphoria. Because of this, we expect another surge in the markets before a big crash.

Also, it’s an election year. The plunge protection team and other financial guards will do all they can to keep this economy from crashing this year. And their efforts will likely spill over into next year as well.

With these considerations in mind, we may see a strong rally in metals in the coming months, perhaps peaking for the short-term sometime this summer. Stocks, on the other hand, we expect to do the opposite, dropping over the next couple of months, but turning up in the months leading to the elections. Metals might pull back during this time, but we don’t expect to see these lows again.

For your prosperity,

J. Keith Johnson
The Gold Informant

Beginning with gold’s precipitous drop on February 28^th, the S&P and precious metals have walked in a sort of lockstep, shadowing each other’s general course. The reasons for this might be difficult to discern. But one of them would be greater confidence in the economy at that time coupled with an overbought condition in the metals.

During the past couple of months there’s been a great deal of uncertainty in the markets. No clear sense of direction, consistent or even rational movements have been forthcoming.

Euro concerns have driven the dollar up. While we had expected them to drive precious metals up as well, it wasn’t to be. Instead, risk assets simply dwindled in a sort of meandering descent, as seen in the graph as well.

With the bank runs in Greece, and now some in Italy and Spain as well, perhaps more pressure is being placed on precious metals. The dollar moving up in response seems to have negated any upward activity in the metals, however.

Now we have more political instability in Greece, followed by a socialist president elected in France. This too is turning heads. Wealth is fleeing France upon Hollande’s promise to raise taxes on anyone making over $1 million; another reason for flight from the euro, whether to dollars, precious metals or other assets.

Today this might have come to an end. See the chart below.

As you can see, the S&P 500, represented by the ETF “SPY,” and gold, represented by the ETF “GLD,” have been moving largely together. But today, they parted ways. Gold, and silver, both headed up while the S&P took a steeper turn down.

Could this be the turn we’ve been waiting for? It’s too early to tell. But another day or two of this digression from one another could spell at least a small crash in major indexes and a rise in metals. Watch the dollar for further confirmation. If it goes down, then that’s another sign that metals will be moving up.

We’ve been waiting for just such an event for months. If you’re not in yet, you might give it some serious consideration.

For your prosperity,

J. Keith Johnson
The Gold Informant

S&P 500 and Metals Parting Ways?

For the past couple of years Greeks have been pulling cash out of their bank accounts, fearing bank runs, or worse. But that was based on continuous austerity and a fairly predictable pattern.

With the current situation, things are getting worse. The government is untenable. They can’t put together a plan, a working government and, thus, a viable future for Greece. With an economy that’s already on a destructive spiral, a government with no clear direction may very well be a death knell.

Apparently the people of Greece think so too. As of Monday, runs on Greek banks mounted to new highs, threatening to overwhelm the financial system. As depositors withdrew over 700 million euro from the banks, reserves fell dangerously low.

Greek depositors withdrew €700 million ($898 million) from local banks Monday, the country’s president said, as he warned that the situation facing Greece’s lenders was very difficult.

In addition, over 100 million euro have been converted to bund bonds, removing more of the currency from the Greek banks. This current course will result in either a need to import more euros from the ECB or withdrawal limits. Regardless of what happens, the situation has grown to what many consider a point of no return.

Take a close look at what’s happening in Greece right now. You may see it repeated in Portugal, Spain, Italy or even Ireland. This is what happens when people lose confidence in the local bank structure. Some are losing confidence in the euro, fleeing to other currencies or assets. This may be a good reason the dollar has shown so much strength lately.

Now consider what would happen here if the stock market were to tank. We discussed this recently. But this gives us a picture of what happens when confidence in the system erodes. They’re not necessarily fleeing the euro, but they are fleeing the banks. When people flee the banks, much of the financial system simply locks up. There’s nothing you can do when there is no cash flow to do it with.

This can cause a deflationary reaction. People won’t buy things for a while, out of fear that they can’t get cash again. Spending has already become much more reserved, focused mainly on necessities.

Imagine our own economy if the entertainment industry dried up. How many would lose jobs? How much more would they need to restrict spending?

Amazingly, this news has not helped metals’ prices. In fact, as of today, we’re seeing another down day. This is another example of why we can’t count on the news to sway sentiment consistently. Normally, when people lose confidence in a system or currency, precious metals go up.

Could the last low be in? Who knows? I know I don’t. In fact, I’m surprised to see these levels. Buying was up early today, with good volume. As of this afternoon, volume is low, as are prices. But indications continue to point to an oversold condition, ripe for serious gains in the near future. Will it be today? Tomorrow? We’ll let you know when it happens.

For your prosperity,

J. Keith Johnson
The Gold Informant

Is Greece a Picture of Our Tomorrow?

Of course, for all those who make less than the $1 million mark, this is fine. It means that the country might make up for deficits, taking the pressure off. But not so fast…

How does a 45% tax on $150,000 or more sound? I’m sure it would be graduated, so that someone earning $999,900 isn’t netting more than if he’d made just $100 more. But the result may be the same regardless.

Clearly attempting to put himself on ground level with the common Frenchman, Hollande audaciously stated, “I don’t like the rich.” But what could this possibly mean? Consider the evidence of his despise of wealth.

• Shares a spacious apartment with Valerie Trierweiler in Paris.
• Owns a villa in Mougins, a Cannes suburb known as Picasso’s home – valued at 800,000 euro
• Owns a flat near the promenade in Cannes – valued at 230,000 euro
• Owns another flat near the promenade – valued at 156,000 euro
• Has agreed to cut his pay by 30% – to 156,000 euro per year, plus massive expense accounts and other benefits
• Currently holds three accounts in French banks (two with Societe Generale, one with Postal Bank)

Who exactly is Hollande identifying himself with, having alienated the wealthy and being clearly out of league with the average man on the street? We’ll leave the answer to the reader’s discretion.

The effect of his anti-rich rhetoric is already beginning to make waves though, before he’s even had time to sign any legislation into effect. The wealthy apparently do not plan on taking Hollande’s socialistic agenda sitting down. In fact, it appears that they will be taking to flight in light of threats to their prosperity.

Emma Rowley, writing for The Telegraph, reports:

High-earners are changing their behaviour so they appear safely based in London before any painful crackdown. “Partners are coming over to establish a track record of behaviour that is outside tax, from an early stage, so that they can respond quickly to what is coming down the track,” said a senior source at one private equity firm.

“The exodus will mean a lot of France’s biggest earners relocate to London,” said a hedge fund manager. “It won’t be possible for everyone, but those who can make the switch will definitely be working on a contingency plan.”

One US bank was organising tax advice for its Paris-based staff, said a source: “Naturally people are concerned, and we are just trying to make sure we address those concerns.”

Experts don’t expect big businesses to leave France any time soon. It’s simply too early to make such monumental decisions. But they are attempting to help employees prepare for more aggressive taxation. Furthermore, the measures being threatened by the new socialist leadership will all but assure that no new businesses will want to move to France.

How will this affect the euro? That’s a question that’s yet to be answered. While the demise of the euro seems all but certain, political maneuvering can stave off the inevitable for an incredibly long time. However, the longer it’s propped up, the worse it will become. And the worse that fiat currency becomes, the more attractive precious metals become.

On another note, Hollande never made it to Berlin to meet with Angela Merkel today. His plane had to return to Paris, having been struck by lightning en route. The irony is too obvious to point out.

For your prosperity,

J. Keith Johnson
The Gold Informant

It seems that some who’ve held silver for a long time, expecting it to continue up into triple digits, are losing their resolve. In light of the downtrend we’re experiencing, this is very understandable. But the direction silver had headed in the past couple of months does not paint the big picture. Let’s see if we can paint it more clearly.

In the chart below we have silver’s performance over the past five years. For those who got in at the beginning of the chart, you’re still sitting on substantial gains of well over 100%. But even if you got in late, even at the highs of last year, today’s study offers some encouragement.

In order to grasp the significance, we have three charts to offer. The first one, below, is a simple five year chart, with RSI and MACD included. What we need to do is compare these indicators with past performance.

We have two main time periods we’re concerned with, early 2008 and the past year. Though from this chart it’s hard to tell, you’ll see that there are many similarities between the two time periods.

We hit a peak in early 2008, which is very easy to spot. Notice also that the RSI and MACD both peaked at this time. When these two indicators are up high like that, it usually indicates overbuying. In other words, the buyers picked up more momentum than the market can bear. This leads to a correction, which ensued shortly afterward, gaining speed as it approached the end of the year. The result was quite challenging for silver holders.

We see similar movements in the metal and indicators within the past year. Both MACD and RSI were very high coming into last summer. This precipitated the peak from which we have continued to contract ever since.

Much of the challenge in relating the two events is due to scale. This is because a 5 dollar movement on this chart is small, even though it might indicate a 50% increase in value toward the end of 2008. The same 5 dollar movement in early 2011 would have represented a 20% movement. Neither is anything to look down on, but it reveals how we must look at each time period according to its short-term scale in order to better grasp the similarities of the movements. With this in mind, we’ve prepared two charts that cover two year periods of similar action.

As each contraction came, RSI and MACD dropped hard, bottoming in Sept 2008 and October 2011. But notice that the bottom did not come at this time. This is when the contraction had the most momentum. But then, as they rose, the momentum slowed, until finally reaching sustainable support levels.

What followed in 2008, though, was one of the strongest bull runs in silver’s history, culminating in the high of 2011. Today we’re facing some similar indications. Notice that the RSI is turning down hard. This indicates overselling. Also notice that the MACD lines are moving down as well. They’re not as deep as we’d like for oversold, but they are showing some signs.

While other factors are involved, this is reveals the probability that silver will actually contract a little more. It could be a simple matter of days. But, overwhelmingly, it points to a strong reversal and continuation of the bull market.

How high will it go? That’s difficult to predict. But, if past experiences are any indication, if we get down to about $28 before the uptrend is reestablished, setting new records is certainly a possibility. Some expect we could do so by July. Remember, silver went from just over $25 to just under $50 last year, in a matter of a couple of months.

When it moves that fast, it’s very difficult to find dips to buy. With this in mind, this week is looking like a good week to buy the dip.

For your prosperity,

J. Keith Johnson
The Gold Informant

With this in mind, many were anticipating the Asian trading last night as PAGE opened for the first time. They were disappointed with flat trading throughout the night. In other words, though it could eventually have some bearing on the market, traders simply didn’t notice. In fact, this morning gold and silver are both showing signs of weakness.

Some interesting research from Nick Laird comes to us via Ed Steer’s Gold & Silver Daily. It’s not good news for short-term gold traders.

“This indicator over the last five years has given some of the most brilliant buy signals of all the charts I have. On each of the buy signals the markets ended up considerably higher many months later. Now it has just given a sell signal.”

“I don’t know what will follow, but I think we’ll find out soon enough. New lows won’t surprise me now. Sub $1,500 is a good possibility.”

“But I want to add the caveat that we could still bottom between here and the low in December…and if we bottom in the next $30 and then move higher than the low in December…that will validate it as the low. If we break that low, then yes, it could get ugly.”

This actually makes sense, short-term, but misreads part of this oscillator. Rather than bearish, it offers some encouragement for long-term investors and those looking for opportunity to enter the market. Here’s what I mean. Notice the steep spike in November that corresponds with the steep spike on the oscillator at the bottom. If we had divergence pointing to much lower prices, when the low came in at the end of January, the oscillator should have dipped below the previous lows. In other words, the divergence is actually positive, not negative. This gives us a clue that the low is either in, or close at hand.

This isn’t perfect, by any means. But it does offer us a clue that current lows may be setting up for new highs. If you’ve been following us, then you’ll remember the following chart from a couple of days ago.

Remember how the drop in 2008 set us up for the rally that lasted from late 2008 until the high of last year. These spikes are followed by a consolidation, setting up a new opportunity to buy before the bull starts running again. With more consolidation, per Nick Laird’s chart, we may be setting up for one of the greatest buying opportunities since the lows of 2008, after which gold more than doubled over the next three years.

Does that mean we should wait to purchase precious metals? I wish I had that crystal ball. It may be that the next week or so will offer some lower prices for investors. But when will the turn come? That’s the question we must ask; and the signal we watch for daily. When that happens, it can be so fast and furious that all but the quickest triggers won’t realize it’s happening until it already has. With this in mind, why wait?

As we enter the weekend, I’d like to offer one last thought. Recently readers have seen some expectations here that we will have a strong rally soon. It would be irresponsible to expect strong rallies all the time. In fact, if readers go back over previous articles, it’s clear that the focus has been on underlying fundamentals and holding long-term, regardless of market conditions. However, recently the consolidation has offered such a unique opportunity that it would be just as irresponsible not to share with readers what we’re seeing.

With this in mind, please evaluate your situation carefully. Technicals are indicating a surge in many markets in the coming months. When that surge happens in metals, we won’t be calling for a significant short-term rise any longer. We’ll be enjoying the ride. And, we’ll simply keep pointing out the benefits of owning metals. A core position in metals should be an integral part of any portfolio. It really is as simple as that.

As a final note, don’t forget your mom’s this weekend.

For your prosperity,

J. Keith Johnson
The Gold Informant

New PAGE in China..

We’ve talked often about manipulation in the precious metals sector. There are two main facets of it. One – that central banks can trade between each other, affecting markets. They can also dump into the markets at key times, causing stops to be triggered, which dumps more silver into the market. This is related to the second facet – there is much more paper silver traded than actual silver available for trade. Consider this quote from Ed Steer.

There were no reported changes in GLD yesterday…but it was a different story over at the SLV ETF, as an authorized participant withdrew an eye-watering 3,882,296 troy ounces.

Well, the new short interest figures were posted over at shortsqueeze.com last night…and I wasn’t impressed.  It showed that the short position in SLV increased by 13.54%…or 1,522,300 shares/ounces.  The SLV short interest is now up 12,766,500 troy ounces/shares…which is in the neighbourhood of 397 tonnes…more than six days of world silver production.

And if you think I wasn’t impressed with the increase in short position in SLV…I was gobsmacked by the change I found over at GLD.  Its short position increased by 42.76%…or 5,360,700 shares.  GLD is now short 1.79 million ounces of gold, about 56 tonnes of the stuff, which is not an insignificant amount.

Of course these numbers don’t include what happened to silver and gold during the last couple of weeks….and I would suspect that there have been major reductions in these short positions in both SLV and GLD since then, but they won’t show up in the above mentioned report until May 23rd.

All of these short positions have no physical metal backing them…and is one of the reasons that I wouldn’t touch either of these ‘investment’ vehicles with a 10-foot cattle prod.

The new Pan Asia Gold Exchange (PAGE) could offer a serious challenge to such shenanigans. By offering physical metals to Chinese bank account holders, held in their bank accounts, the potential demand placed on precious metals could render manipulative short positions all but impossible.

Consider this statement from Lee Coates.

Bottom line: if China simply reduced their fiat holdings by 1% and then moved that same amount into precious metals, gold and silver prices would necessarily have to double in price.

Now….what if the Chinese move more than just 1% from fiat to PM’s? What if other countries decide to join in? This is a game changer. Don’t procrastinate on buying gold and silver any longer.

For some reason, mainstream media and financial commentary has ignored this event. Why? Who knows? It doesn’t affect the major indexes, so maybe they don’t care. Precious metals are largely considered a problem child by the mainstream anyway, so perhaps this is just a non-event for them. If so, then it’s incredibly myopic on their part. Of course, mainstream majors in myopia since it sells, so that would be nothing new. Consider Andrew Maguire’s comments on KWN.

Just look at the scale of this to get an idea of how massive this game-changer will be, The Agricultural Bank of China has over 320 million retail customers and 2.7 million corporate customers and has integrated its customer account information system with this platform.

By creating the first ever rolling spot contract, Chinese bank customers will for the first time have ease of access to 10 ounce gold contracts in Renminbi directly from their bank accounts and with the click of a mouse.  To give a further idea of scale, if just 1% of their customers bought a single 10 ounce contract, that would equate to 1,000 tons of physical gold being drawn down.

The impact on the price of silver will be even more pronounced.  Silver is a much smaller market and already in tight supply.  If just 1% of Agricultural Bank of China customers buy 500 ounces of silver, that would require 1.6 billion ounces of silver!  I believe the leveraged and naked existing short side concentration in silver will be blind-sided by this.  In my opinion it will create a massive short squeeze.

None of this potential new physical demand has been factored in by analysts and I expect a large and unanticipated drawdown of physical gold and silver over the next few months, ahead of the international contracts going ‘live.’

One of the key points here Eric is that many of these shorts are naked and heavily leveraged.  Thus for every physical ounce of gold and silver taken out of the physical market and into this new exchange in China, it will force many multiples of that to be covered in the paper market.

Could this be the catalyst we’ve been watching for? I seriously doubt it. But it does offer another credible reason to expect a surge in the near future. If shorts get squeezed hard, the rise could be on a much larger scale than we anticipate.

Between technical analysis giving oversold indications, troubles with the euro and continued deficit spending in both the public and private sectors of the U.S., there are many reasons to expect an explosion in precious metals, offering what may be the best opportunity in over 30 years. It’s entirely possible that this is part of an effort to establish some precious metal’s backing to Chinese currency as well. We’ll keep an eye on this tonight and comment on it tomorrow if there’s much going on. Otherwise, we’ll let it shake out for a little while as we watch from the other side of our shrinking globe.

For your prosperity,

J. Keith Johnson
The Gold Informant

Is China Turning the PAGE on Precious Metals’ Shorts?

We’ve often pointed out that we may very well get lower lows before the next rally. While mainstream continues to give up on gold, there are many good reasons to remain bearish. Here’s one. Looking at this chart, we get the big picture. There are a few things for us to notice here.

In the green bands we have periods of what can be termed a blow-off top. It’s when there is a buying frenzy that outpaces the market, providing what might be termed a short term bubble. When shares are over-bought, there must be a correction, illustrated by the blue bands. Often the correction turns into an over-correction.

We can see that this is exactly what happened during 2008-2009. It happened again in 2011-2012, putting in the corrective phase today. Where will it bottom? That’s a crystal ball question we cannot answer until hindsight provides such clarity. However, it does appear that we may be ending this corrective wave.

Now consider the following chart. It reveals some technical indicators of the SPDR gold ETF, GLD, over the past 5 years.

Notice the indicators and bands for our rise and pullback in 07-08. On the rise to the top GLD consistently rode above the moving averages. RSI moved up near 90, indicating overbuying. Volume was not spiking with the new highs, however, showing a lack of support at that point.

This pattern was repeated recently, as the highs came in during late 2011. However, look at the corrections during both periods. RSI dips below 50. Price dives below moving averages. Today we’re seeing the 100 day moving average just about broken. It doesn’t need to be broken for a reversal. But we can see a very similar pattern here, indicating overselling. RSI today supports this, having moved below the 50 mark.

I want to reiterate that nothing is positive until it’s happened. But these indicators help us see that we’re in a situation that has fairly consistently provided a reversal. Will it happen tomorrow, next week, May or June? We really don’t know. But it does seem that buyers are preparing to jump into the market soon. Some think that when Ben Bernanke speaks tomorrow we’ll see it happen. For now, this still represents a dip = an opportunity.

For your prosperity,

J. Keith Johnson
The Gold Informant

Gold’s Vitals Reviving Today

Watch for spins from governments attempting to make lemonade from the sour grapes they’ve raised through austerity and more Keynesian manipulations. It’s all unraveling, and coming to the point where the only way they can save face, for the short-term, is by playing with numbers and spinning the stories. The reality is coming home to roost, sooner or later. At this rate, it seems like it’ll be sooner.

With the recent downticks in precious metals, many more are getting shaken out. To top it off, some very high profile names are on a gold bashing campaign. One has to wonder if they’re accumulating in the process.

Charles Munger told CNBC that “Civilized people don’t buy gold… invest in businesses. Gold is a great thing to sew into your garments if you’re a Jewish family in Vienna in 1939.” On the last note, we couldn’t agree more. What Munger fails to acknowledge are the similarities, other than ethnic profiling, between policies developed in Germany then, and America now. They were on a path to economic ruin.

Furthermore, with new “Patriot” laws enacted, the three and four letter branches of the government are gaining greater power to access and restrict the liberties of the American people. Consider this article from GATA.

The trend toward unlimited government lately has become overwhelming, from the stupid imperial wars being waged by the United States every few years to the comprehensive surveillance undertaken under the “Patriot Act” to the “financial repression” that even a recent member of the Federal Reserve’s Board of Governors complained about a few months ago (http://www.gata.org/node/10839). This prompts our friend Bill A. to chide Munger that the United States in 2012 is in danger of becoming like Vienna in 1939, insofar as anyonenow is subject to the abuse heaped on Jews by the Nazis.

Bill Gates was on CNBC as well (a trend?), though he wasn’t quite as hard on the yellow metal. He simply sees it as somewhat unpredictable and useless, to loosely paraphrase. Of course, if you had sold all your Microsoft stock in 2000 and bought gold instead, you’d have done VERY well.

Warren Buffet has been very vocal about distancing himself from gold. In the 2011 Berkshire Hathaway Inc. annual report, he stated,

Gold, however, has two significant shortcomings, being neither of much use nor procreative. True, gold has some industrial and decorative utility, but the demand for these purposes is both limited and incapable of soaking up new production. Meanwhile, if you own one ounce of gold for an eternity, you will still own one ounce at its end.

Isn’t that part of the point? When you own an ounce of gold, it’s still an ounce of gold. It can’t become less than an ounce of gold. It can’t be devalued to half an ounce of gold.

Where will cash-strapped banks turn for more stable and yet liquid principle? The answer is simple. In fact, it’s already happening.

For your prosperity,

J. Keith Johnson
The Gold Informant

Gold Losing Luster