Gold: The End Of An Era, And Price Manipulation

Summary

• The market is experiencing tremendous demand. Gold has taken the limelight as fund managers and institutional investors are starting to invest in gold over concerns with the US dollar.
• The collapse of the market in March this year meant that the shorts suddenly could not cover and the physical market lacked the supply to cover all the shorts.
• The Fed has little room to manipulate interest rates and the gold market is beginning to realize that this is the end of the manipulation of gold.
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Over the past seven or eight years, with the removal of the uptick rule, central banks and big institutions could short the gold and silver markets without the ability of buyers to get out of a position. By selling short on the paper market, price discovery got skewed far below where the real price should have been. The paper shorts that were sold were far in excess of the physical amount of gold that was available. The collapse of the market in March this year meant that the shorts suddenly could not cover and the physical market lacked the supply to cover all the shorts. Gold was then free to find its real price based on supply and demand, without the paper manipulation which had been suppressing the price. Central banks supported the manipulation in order to prop up the US dollar as the world’s reserve currency. If gold rose in price too much, then the US dollar would fall in value, casting even further doubt on fiat currencies, of which the US dollar is the leader.

Gold is a commodity, an economic indicator, and a currency. For thousands of years, gold has been highly valued. It's the last resort of protecting your asset’s value when we have a paper currency. Before 1971, the US dollar was backed by gold. Then Nixon took the dollar off the gold standard to help pay for the debt from the Vietnam War. The dollar then became a fiat currency with no physical backing. It then began to fall in value and has lost more than 90% of its value since then. In large part, that's why many US dollar-backed assets have inflated so much since 1971. The asset itself is not worth any more, it's just that the US dollar is worth so much less that the asset has to rise in value to remain the same.

If you invest, therefore, knowing what currency the asset is valued in is critical. Your stocks may rise 10%, but if they are US-dollar denominated and the dollar falls 10%, you haven’t made any profit or increase in your asset value. For example, silver coins from before 1971 are still worth the same amount as they were, whereas a 1971 dollar is only worth a penny or so. The silver dime is worth enough to buy a gallon of gas, whereas you need three or four more dollar bills to buy one gallon of gas. This devaluation is gradual and largely goes unnoticed. People who travel do notice it. In the 1960s, the dollar always was worth far more than almost any other currency. Today, some other currencies, such as the Euro, are now worth more than the US dollar. This makes it more expensive in US dollars for Americans to travel to Europe, whereas in the 1960s, Europe was dirt cheap in comparison.

The coronavirus pandemic revealed the weakness in the global economic system and in the US dollar and other fiat currencies. With increasing debt over the past few decades and the lack of a gold-backed currency, the economic system already was weak. The pandemic revealed that weakness. Emerging countries are being hit especially hard since they use the US dollar as a reserve currency and they cannot just print more dollars to address the economic disruption caused by the pandemic. Governments had to come into the market and infuse the system with a great deal of cash. If they had not done it, the global economy could have collapsed into a deflationary black hole. However, that intervention has further weakened the system in the long term. Every dollar they print devalues the intrinsic value of every dollar. That's why gold is rising. When you buy gold, you sell dollars. That choice further weakens the value of the dollar.

Since March, after an initial rally in the US dollar, the dollar has been in decline. The Treasury has said they will print as much money as required by the crisis. They are not worried about inflation. In fact, inflation would be welcomed, since it would remove the deflationary fear that's in the market. The big question is whether the amount they have printed is going to be enough.

In real estate, prices outside some of the major cities are exploding. People are leaving the cities, looking for other places to live. White collar workers can work remotely and some are choosing to live in cheaper areas outside cities. Cities will be faced with declining tax revenue even as their costs in relation to the pandemic increase. The larger question is the comparison of quality of life in a big city, such as San Francisco, where a home costs a fortune, compared to a smaller city where you can buy a mansion for the same price. These changes are marking a transformation in the economy and in many sectors. The lockdown also caused demand for many products and services, such as for restaurants and air travel, to collapse. Such changes are still rippling through the economy and we have yet to see their full effects. We are not going to return to the old normal. Things have and will continue to change. You need to be aware of the changes and try to take advantage of them. These changes offer a tremendous opportunity to make great wealth. This is a once in a lifetime opportunity, particularly if you are a millennial. We will get through this and we will get the virus under control, but things will change. Gold went from $1,454 in March to more than $2,089 as of Aug. 8, 2020. Opportunities are out there and gold is a great one.

With the new highs, some took profits so the gold market eased back some. This is not a sign that gold is going to collapse. It indicates that gold is entering a new price fractal with a high target of about $2,600. This correction is setting the market up for a new level of support around $1,932. The Buy 1 level is $1,932. This is a great time to add to your long-term positions in gold during a short-term correction.

Gold

Gold is at $1,949.60 and it's in a fast market up $4.70. The daily Variable Changing Price Momentum Indicator (VC PMI) numbers have the mean at $1,956. For the weekly, the average is $1,956. Therefore, the averages are in harmonic alignment, which connects the daily and the weekly numbers. This means $1,956 is a high probability pivot point. If the market is able to penetrate through this level, it will set up a bullish price momentum.

Courtesy: Ticker Tocker

Last night the market came down at about 11:45 to the daily Buy 1 level of $1,932 and activated a buy trigger by closing above it. It has a 90% probability of a reversion back to the mean. The daily Buy 2 level is $1,915, which has a 95% probability of the market reverting back to the mean from that level. We integrate the daily and weekly numbers for the majority of our trades as well as often adding the monthly numbers. When they are in alignment, the probabilities are highest for a profitable trade for day or swing trading.

Gold went up and then came down to test $1,932, activating another buy signal. Buying interest came at about 4:30 am and activated a buy trigger at $1,937.90. The level below we used as a protective level, while the level above became the target ($1,956). The pattern was completed with a nice profit of $1,500 to $2,000 per futures contract.

We appear to be in a long signal with a target of $1956 again. We use DUST and NUGT, aggressive ETFs, to trade the market short term. This adds a little more juice to trading the market. We are long the GDX and SILJ. We are using this correction to add to our long-term positions.

For gold, a close above $1,956 will activate targets at $1,973 to $1,998. The weekly will ignite at $2,004. The market is experiencing tremendous demand. Gold has taken the limelight as fund managers and institutional investors are starting to invest in gold over concerns with the US dollar and zero interest rates. The Fed has little room to manipulate interest rates and the gold market is beginning to realize that this is the end of the manipulation of gold and the propping up of the US dollar. The gold standard should be brought back to a currency to provide stability. Unless someone does something about fiat currencies, the global economy is going to suffer and possibly collapse. Fiat currencies can’t continue to erode in value forever. At some point, they will be worth almost nothing and inflation will begin, possibly even hyperinflation. Global leaders appear to be focused on deflation in the short term and not inflation in the long term. We already have seen the deflationary collapse in March and gradually since 1971 in the US dollar. No one knows what the end result will be, but gold continues to offer a safe haven, an alternative currency and a physical asset at a time fiat currencies are worth less and less.

Disclosure: I am/we are long GDX. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.