Precious Metals Update: Germany's Gold Hoard And The Mark-Up Epiphany

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Includes: MFGLQ
by: Bret Rosenthal

Gold & Silver: Are You Enjoying the Ride?

I wrote a post on November 4, titled. “Precious Metals Outlook: Volatility is Part & Parcel of a Major Bull Market” and this month has not disappointed. The wild swings of the metals continue unabated as the struggle between good and evil play out in Europe and right here in the USA. The struggle I refer to encompasses the almost constant stream of news stories that either put a strain or a surge on global liquidity.

Please stop listening to the worthless commentary from whatever news source you prefer. The commentary is misleading and will never help you understand the true direction of the markets. These news sources want you to stay confused and in turn hooked on the worthless swill they peddle. Instead, take a brave step out from under this news tyranny and join us using an ancient and perhaps subversive technique. Be careful, this technique is dangerous to the status quo and may cause ostracism among your peers. Are you prepared for the revelation? Please make sure there are no children around to read the words I am about to write.

Ancient Technique to Interpreting News and Understanding Markets:

Common Sense

You may feel a little light headed, this is normal just relax and breath. While this remarkable concept sinks in I will attempt to apply said ancient approach to the news cycle of November. The beauty of this technique is that I will not need paragraphs and hours to explain the markets’ reaction to the November news cycle. COMMON SENSE allows us to place all the news stories into the proverbial ‘pan’ and then ’sift’ for the nugget of truth.

And the biggest nugget of November is this: The MF Global (OTC:MFGLQ) story of fraud and corruption has disturbed the delicate confidence of professional money managers and traders. The bastardization of the haloed ’segregated’ account has rocked market professionals to the core. The COMMON SENSE reaction to this disturbance in the force is to withdraw liquidity.

Rosenthal Investing Axiom: Follow the flow of liquidity and you will know the direction of equity, commodity and credit markets.

So, until this MF story subsides and steps are taken to restore confidence in the system between Prime broker and client, expect liquidity to leave the system and volatility to remain high. Add to this cauldron of concern the smaller nuggets of European confusion and we have a recipe for real trouble.

On a positive note, all this uncertainty plays right into the hands of Gold bulls over the mid to long term. Of course, in the short term when liquidity leaves the system all assets are affected at once and Gold is no exception. However, these short-term moves offer outstanding opportunities to add to precious metals positions as all fixes to the system lead to higher prices. I will explore one such fix.

Gold is very slowly emerging as part of the discussion in Europe on how to solve the European financial crisis. Witness the call for Germany to use its gold hoard to collateralize the EFSF bond fund. Germany, of course, declined. The epiphany that is sure to follow is all of Europe’s financial problems can be solved if Germany’s, Italy’s, France’s etc. gold reserves were substantially marked up in price. Gold is on the asset side of the balance sheet and is dramatically undervalued relative to the debt or liability side. The debt market is gradually closing in Europe. Therefore, either the asset side materially appreciates in value or bankruptcy becomes unavoidable. In the immortal words of Eddie Izzard “it’s either cake (revalue gold) or death (bankruptcy)”. Which alternative do you think the European leaders are going to eventually choose? Cake or Death?


Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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