At face value Gold (NYSEARCA:GLD) and Silver (NYSEARCA:SLV) are merely scratching the surface of the consensus market value. But lets dissect that which is artificially suppressing the current price in addition to rock solid fundamentals. Let's start with the most widely talked about precious metal gold first. Now on its third attempt at convincingly breaking through the $1,000 level, many exogenous factors must be taken into account most notably the Gold Cartel.
1) For those unfamiliar with the Gold Cartel, it is nothing more than the worlds largest banks initiating massive short interest every time gold heads to $1,000. But it doesn't take a rocket scientist to realize this is by request of the FED. Though I have no factual evidence, should the banks fail to suppress the price (which is inevitable), the FED will merely inject more reserves into the system. The current short interest by these "financial giants" or more accurately "puppets of the fed" is at record high's yet gold has maintained its longest time above $1,000. This smells like consolidation, or in other words, the continued strength of gold in continually making higher lows. Is $1,000 the floor now? Maybe not, but it will sure in the high 900's.
2) Gold is being attacked not only by the gold cartel but by the IMF who recently announced a planned sale of a rather significant magnitude. Somewhere in the neighborhood of 40 million tons (though I may be mistaken). But Gold and Silver (which I am personally more bullish on) continues to trend higher, seemingly unaffected by any happenings in the market. Why is this happening?
3) Well in my opinion there are several reasons for this type of reaction, all of which are deeply intertwined in the underlying cause. It may be easiest to begin starting in November of 2008. At this time enormous stimulus packages were agreed on (both in the U.S and internationally), exponential expansions of excess reserves in the U.S and to a lesser degree in Europe, Unprecedented increased in the monetary base both by the FED and ECB combined with artificially low interest rates around the world (making way for a future of global inflation of varying degrees), Bailouts that have now amassed over 10 trillion ( excluding the FED's purchase of almost worthless agency and commercial paper in addition to debt monetization and trillions of even more worthless mortgage backed securities. If that isn;t enough we have increased our public debt to nearly 13 trillion (making just the interest payments nearly impossible to service for a sustained period of time). This brings us up to approximately march or April 2009.
4) This was more or less the time where China and other creditor nations began to express their deep concern publicly ( What do you think was said behind closed doors?). This was soon followed by the Chinese announcement that they will begin using Yuan swaps with other international trading partners, further showing their increased concern over the USD. This was soon followed by even more announcements that became even more indicative of their state of mind. They publicly agreed to trade with Brazil in both their respective currencies (which is likely to spread to many other major trading partners). I can't fail to mention masses of Chinese students laughing Timothy "I am exempt from the income tax" Geithner being laughed off stage when promoting a "strong dollar policy".
5) Now we come to the Japanese, who are finally getting in touch with reality as the new regime takes the reigns. They made it clear buying more U.S debt isn't gonna happen in this lifetime and their focus is on the domestic economy, not propping up the phony U.S pipe dream. This followed the multiple U.S debt auctions (which have double mid/long term yields in just 6 months) (NYSEARCA:TBT) , (NYSEARCA:TLT) and their secret but brilliant approach to dealing with the U.S. On the surface they appeared to have been buying our debt but rather they were swapping long maturity treasuries for short term treasuries so that by the time it mature it is not completely debased.
6) I previously mentioned in another post the ensuing bankruptcy (though it will be bailed out) of the FHA ( the largest holders of mortgages). They have a mere 35 billion in loan loss reserves for well over a billion of outstanding mortgages ( Yeh, that will cover the the hundreds of billion of defaults as unemployment surpasses double digits and the majority of ARMS reset!). Even worse is the furious pace they are originating new loans to the most unqualified individuals with less than 2% down when you include the tax credits. This is basically No money down! Aren't all these same policies the ones who dug us this ditch and making hyperinflation a possibility?
USD index at 130+ in 2000....... 90 in 2008.......76 thus far in 2009 ( and you haven't seen anything yet)..You decide.. (NYSEARCA:UDN)
Disclosure: Long TBT, TLT CALLS