Monday, December 24, 2012

Gold at a critical technical point

Let me recap recent history: I think gold ended a major 4th wave in a triangle or so called "pennant".  Then I predicted it would break out, and it did.  Then I began to call an end to the first wave (first of 5th that is) which I believe is now confirmed.  I labeled it blue 1 below.  Following that, an a-b-c retracement to exactly the 61.8% fib, again as expected by the EW model.  I'm now tentatively labeling that blue 2 although it is not fully confirmed yet. 

IFF this modeling of the EW principle continues to hold true then we should finally see a big breakout 3rd wave for gold.  This is marked by the blue line with "To 3".   Again, both conventional and EW analysis indicate that gold could hit $2200 or $2300 during this 5th wave (220 or 230 for the GLD ETF).  As Yogi Berra liked to say, "prediction is very hard, especially about the future".  At the same time, there is an important new dynamic at play here which reduces the chances of being wrong and that is the impending debt spiral of Japan. 

Japanese people, like other Asians (a group which includes India and others in the region), know that gold is money.  But Japanese workers are also among the largest holders of Japan's debt.  By "workers" I really mean their aging boomer demographic.  None of them want to go down with the ship.  They need that stored wealth in order to survive in their old age.  But now their new leader is literally promising to screw anyone who has wealth denominated in Yen.  More than a year ago I wrote an open letter to the people of Japan warning of the impending economic collapse that I strongly believed (and still believe) to be unavoidable.   Now, Abe's taking over the helm and he's taking control of the Japanese money supply in order to fuel his own desire for power and control.  This is a clear indication that the day of Japanese economic collapse is closer at hand than most people suspect.  In fact, it could be as soon as 1-2 years away, perhaps even closer.

In the past, the US was able to control the gold price so that it didn't fly away suddenly and incite the animal spirits of people to go buy it in a panic.  With the Japanese Yen sinking, common wisdom is that the dollar will strengthen in comparison.  Thus, say the pundits, gold will fall in dollar terms (stronger dollar is supposed to equate to buying more gold per dollar spent).  And in fact it often plays out like this during normal ups and downs of the market.  But this time I think it will surprise people.  I think gold is not a commodity but rather a competing form of global, universal money.  I think that as Japan falls into the abyss, its people (and corporations) will scramble to get into gold.  That will clearly be supportive of gold's price.

I also think that Bernanke will be forced to try to help Japan, just as he helped most of the central banks during the collapse of 2008.  Not out of the kindness of his heart mind you, but rather because he will fear domino collapse of the global debt Ponzi (AKA contagion).  Also, I think the war planners of the US will argue for economic support of Japan in case we feel the need to start a war with China using a Japanese proxy (we pay, they fight).  This is what I would do if I were a soul-less a$$hole like I know the US military industrial complex leaders to be.  The upshot is that propping up the Yen will weaken the dollar, but it will only make gold grow stronger.

At least one member of the Federal Reserve is on record saying that we are in uncharted economic waters.  That's fancy talk for "we have no idea what will work and what will send us to the bottom".  These are the kind of conditions that make people run to the bottom of Exter's Pyramid.  If you've never heard of it before, it was created by John Exter (a man of substantial credibility in modern finance) and its purpose is to enable the visualization of two important pieces of information:
  • The relative size of assets in our economy.
  • The relative risk of assets in our economy.

Every asset class, and I mean every single one of them in the inverted pyramid shown above is leveraged to the hilt EXCEPT physical gold.  That is not to say that gold based paper is not leverage because it is.  But I think that it is foolish to think of paper claims on physical gold as an asset in the first place.  Only the physical possession of the metal will mean anything if another major collapse hits.  For people who own land and thus think themselves wealthy, I suggest you look at where real estate exists in the hierarchy.  During economic collapse there is significant risk in owning real estate as an asset ranging from its price collapsing to 10 cents on the dollar to people not paying their rent and government disallowing eviction, to being targeted by government since you are "obviously" rich, etc.  Besides real estate is only worth what the next person can get a bank loan for and bank loans will collapse when the debt Ponzi collapses.

I say again, keep an eye on Japan.  The situation there could easily destabilize the entire global economy leading to completely chaotic and unplanned for outcomes.

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