Seeking Alpha
Newsletter provider, tech, gold & precious metals, currencies
Profile| Send Message| ()  

The announcement by the Bundesbank of their intention to repatriate a portion of their gold reserves held in foreign central bank vaults is the beginning of the next phase of not only the gold bull market but the global currency war that began last year when the Swiss pegged the Franc to the Euro (AMEX:FXE) and China dumped more than $100 billion in U.S. Treasuries on the market. Do not believe the talk for a second that the Bundesbank is bowing to local political pressure with this scheme. That is simply a cover story for the real one - that the Gold (AMEX:GLD) suppression scheme has tried the patience of the U.S.'s allies in the same way that happened back in the 1960's when Charles DE Gaulle began redeeming France's trade dollars for gold because the U.S. didn't maintain the Dollar peg to Gold.

So, while history doesn't repeat itself, it certainly does rhyme, does it not?

Jim Sinclair, as his site made it clear what he thought of the matter and while I'm never one to use an appeal to authority argument to undergird mine - logical fallacies are after all fallacies - in this case, I'm going with the thoughts of someone who was there the first time this happened and knows all of the players involved this time around. It would be the height of arrogance to ignore such a person especially on the grounds of another logical fallacy - that of the genetic variety - because he runs a gold company.

Maybe he runs a gold company because he's read the tea leaves properly. Just sayin'.

And, by the way, the bank doing the trading for the ESF that Sinclair discusses in the link above is almost assuredly Goldman Sachs (NYSE:GS), they who put out the call that the gold bull market is over.

I am not a Number, I am a Free Gold

As I said two days ago when this story first broke, it's not a matter of if the Germans will get their gold back, the big questions are: When? How much? And who's next?

Within 48 hours of the original leak, we have an answer for all three of those questions and the answers should frighten anyone who is long the U.S. Dollar (AMEX:UUP) and hence short gold. The when is 2020 and the how much is, frankly, very little - 300 tons. The answer to who's next is most likely The Netherlands.

The last question I have is, "Why so little?" And that answer is easy. Most of the gold in the Fed's vaults has been rehypothecated and everyone knows it. The problem is like Dave Kransler pointed out the other day that both China and the U.S. have a vested interest in keeping the price of gold down. The U.S. because fiscally it is a basket-case and China because they want to accumulate more of the shiny stuff and they are strip mining their country's reserves faster than they can develop mining projects to dig it up out of the ground.

If all of the gold is tied up in derivative contracts that can't be unwound at current prices, then what happens when someone who is not as polite as the Bundesbank shows up and demands their gold reserves that are supposed to be hanging out in New York?

You know what happens. They are told to get in line or take dollars. Just like Nixon did in 1971. But the minute that happens publicly, the whole gig goes up in smoke. So, is that really what the Fed wants to happen? Of course not, so the Bundesbank allows them to save face, temporarily, and only demand a little at a time, just enough to ensure that the price doesn't drop anymore, thereby eroding the ECB's balance sheet due to their gold being marked to market while the Fed's and China's is not.

So much of our current macro market behavior is a big prisoner's dilemma. Everyone knows the system is a Ponzi scheme of epic proportions. But no one is willing to get out of the game first. Well, except Hugo Chavez. He was easily marginalized as a kook and a commie. He may be both; I don't know the man personally. This is what makes the Bundesbank's declaration so important and why I don't believe the official reasoning. Confidence in the system is too important to its continued functioning to allow a shot like this to be fired, even if it's the equivalent of .22 rimfire. We're not shooting rabbits here. The Germans have made it clear there is bigger game at stake and when costs of maintaining the Nash equilibrium are too high, things will spiral out of control.

Does this vindicate the Free Gold camp? I don't know. But I do know that watching Europe slide closer to the side of China and Russia in the Currency Wars versus the U.S., the U.K. and Japan - who went along with the U.S. kicking and screaming in my opinion - is hard to ignore. Their gold is marked to market which makes them supportive of higher gold prices. China is only on the side of higher gold prices because it's good business. But they have plenty of money to buy at whatever price gold is trading at.

(click to enlarge)

Wish You Were Here

I'm writing this on the evening of January 16th after the markets are closed. Gold has held onto $1680 and GLD closed the day at $162.65 per share. Looking at the chart, I think that a close for this week in Gold futures above $1678 an ounce or last week's GLD high of $162.56 would have to be considered a major weekly bullish breakout. Of course, I would feel more comfortable with a close above the spike high from January 3rd near $1700 per ounce but I feel confident that this simple 2 bar reversal pattern is significant, given the enormity of the news this week as well as the strong intra-day effort to keep gold below that $1678.75 high - pull up a daily chart to see that - from last week.

(click to enlarge)

As of the close on Wednesday evening, there were 2 straight daily closes above $1678.75 so, in the short term the level has been tested. Moreover, the odds are heavily in favor of a big move happening during the two trading sessions left - with the caveat of options expiration monkeying with literally everything - based on historical GLD trading data. GLD has only moved high to low $2.04 while it normally moves $5.57 during an average week. A move in GLD during the last two days of the week to challenge the January 3rd peak is very unlikely - the odds are approximately 5 to 1 against it - but a close for the week near Wednesday's close puts the market in a very bullish posture for the following week. That will allow the bulls in a much stronger position to push through $1700 per ounce/$165 per share then.

To add to my argument I offer up the following items:

  • The 5/30 TIPS yield hit 1.88% on 1/15, the largest such reading since 10/18/2012.
  • Total Fed Credit rose $9.31 billion last week to $2.9056 trillion, the highest since the week of 2/29, the Leap Day Massacre that shaved $100 off the gold price in a day.

Silver (AMEX:SLV) has shown even more strength than Gold has. SLV pushed through the peak from January 3rd, hitting an intra-day high of $30.56 before closing on Wednesday just $0.02 shy of the peak that week at $30.45. A close for the week above $30.47 would be a clear breakout in silver on the weekly chart. And while the odds are still low for a monthly besting of the December high - 37.5% to be exact - it will put the market in a great position to do so in February.

(click to enlarge)

Obviously, the possibility of profit taking or whatever can take the prices down before the end of the week, but these are the levels that would mark breakouts for both metals. I'm certainly not the only one that knows this and so expect a lot of resistance to the prices for both gold and silver moving much higher this week and closing above these important levels. I'll be watching Friday's trading closely looking for anomalous behavior to the upside - downside action is easy to spot, just look for the huge red bar on the chart. Given the pattern so far this week of heavy selling pressure from the moment the European markets open any strength seen then would qualify as outlier activity. Sharp rises at the COMEX open and the NY equities open would as well.

The bottom line is that there is a very strong probability at this point that both Gold and Silver have put in technical short-term bottoms which will set up medium-term trends beginning next month. Anyone still short at that point given these signs and portents should be considering therapy or getting a second job, not that Goldman is hiring or anything.

Source: Gold Breakout In Process, Thanks To Germany

Additional disclosure: I own physical gold and silver and a few goats