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Monthy Digger - May 2009


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We'll start off May with Gold Majestic's analysis going forward.

 

Maybe NXD has something up it's sleeve for someone to short cover. Three sells and your out.

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Hi Agent / dharma - yes, back safely and still kickin'. Thanks for the reply and for FRG reminder. Speaking of uranium on a tear, my UUU.to has been a 6-BAGGER off the "Back Up the Truck" October 27th lows! As Charmin is fond of saying, "Who would have thunk it?" :)

 

As for what's going on in the markets. From my perspective, not much has changed since I left. In secular terms, extremely gold bullish. FOMC, not surprisingly, left rates unchanged yesterday and added, "The Committee will continue to evaluate the timing and overall amounts of its purchases of securities in light of the evolving economic outlook and conditions in financial markets."

 

Yes, the Fed continues its gold bullish, monetary inflation playbook spelling out their plan to vary the size and speed at which it monetizes Treasuries. At the last FOMC meeting, announcing a specific quantity of Treasuries to be monetized didn't keep long-term yields where the Fed wants them to be. Now the Fed must try to force the bond market vigilanties to dance to its tune and cadence. If I were a Bond short, I'd be concerned that the Fed could suddenly purchase a sh*t load of bonds on any given day triggering a big squeeze. This is called a bluff in a poker game from a player that is known for bluffs and is no different here in the financial markets. It will turn out to be a big mistake. Yeah, it can certainly slow the bond market's decline by keeping an element of surprise to concern the shorts, but it will do so at the price of losing stability/credibilty in the bond market and increasing the level of nervousness among bond longs. This also means that we'll most likely see increased selling pressure at the margin in the bond market than would have otherwise occurred if the Fed had managed to keep its 3% line in the sand intact. At the end of the day this FOMC move is going to force the Fed to buy even more Treasuries than it otherwise would have had to, which means it's going to be even more bearish for the dollar and bullish for monetary inflation (read GOLD).

 

As for the PM juniors and intermediates, they're currently closer to their March highs, and some are even close to breaking out above them. On the other hand, a lot of the seniors sold off with the GDX back to the bottom of their two-month trading ranges earlier this month. Those that study the sector fundamentals understand that the valuations are generally better in the small cap companies, but I would add that this market action indicates where the true investment money is going in the gold sector as opposed to where the so called hot money employed by the "traders" that require large cap seniors w/ highly liquidity in order to execute their fast and fickle, in and out, forest for the trees trading styles. This steady upside action in these smaller cap companies, as in the past for those who respect history, implies that investment money from investors as opposed to traders (that actually have an understanding of market fundamentals) continue to "back up the truck" in the PM sector even as many of the large caps have whipped around violently between the highs and lows, the Ifs, Ands & Buts of the trading range that the GDX has been in over the past 3 months.

 

Goobers, that's bullish. That's bullish for the entire gold mining complex. :D

 

Obviously, a few "thinkers' have recognized that with all the new supplies of Treasuries that are coming, the Fed is going to have an extremely difficult time in keeping long-term rates down, and as the weak dollar and weak bond market begin to feed off of each other in an increasingly inflationary environment, it's only going to get worse and will force the Fed to buy even more Treasuries than it otherwise would have had to. Speaking of new supply of Treasuries, both the Senate and House approved Obama's $3.4 trillion budget outline yesterday (oh, what a surprise), at least a full third of which will be borrowed (given the declining tax receipts).

 

As I pointed out a couple years ago, there are only two choices that the US must eventually face. (And we are here.)

The first begins its spelling with a capital D: DEFAULT. (Obviously as tax receipts continue to contract, the US can't make debt payments.)

The second also begins with a capital D: DEBASE. (Via the Fed monetizing government debt).

Debasement of the US dollar is the road we've been driving down and the road just got a lot steeper.

 

Again, it's no surprise the Fed continues to manage the dollar's decline in cooperation with the G20 and will use Treasury monetization as one of its methods. It will continue its futile efforts to defend it 3% 10year note, line in the sand. 5 months ago I posted a chart here that showed Treasuries were rolling over and rates were headed higher. Yesterday we just hit a 5-month high and the 30yr just hit a 6-month high.

 

As for the dollar, and given that foreign capital is now in the early stages of abandoning it, it's currently still above its 200-Day MA and continuing to lose momentum, fast. Historically, no Ifs, Ands, or Buts, the long term charts demonstrate that a loss of mo-mo marks the beginning of another gold friendly, big move down.

 

As for the very short term over the next month or so, nothing goes straight up, and we're due for some more consolidation in the gold shares. I'm hoping for another opportunity to take some more shares off the weak hands who invariably sell the bottoms.

 

Oops, there I go again discussing fundamentals. :D

 

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A few more comments on market stuff that eventually affects gold stuff . . .

 

USD/YUAN Chart posted

After gaining over 12% since early 2007, the yuan continued to rally today for an 8th consecutive day. Makes a goober suspect that the Bank of China is finally wising up that there’s more benefit to dropping the US dollar peg when its vigorously stimulating its domestic demand rather than its exports. hmmmm . .

 

If so, (the China wising up part), the US bond holders will really have sumptin' to keep 'em up at night (aside from the record amount of new supply that is being peddled by the Treasury next eeeek!, I mean week) for the obvious reason that China will not be required to be a steady buyer of US dollars to maintain the peg. For the Bond holders' sake, they better hope the USD/Yuan 6.8 support holds! The humungous theater is packed, the play is ending, the single dollar exit is miniscule and goobers be nervously eyeballin’ the door.

 

Dollar Chart posted

The dollar is sailing through rough seas, turning pale as it clutches onto the ship’s railing preparing to heave. I see an accident waiting to happen.

 

GDM:SPX Chart posted

 

Speaking of China, I’m still waiting for the end of the world dooms-dayers’ predictions of its economic demise. As confidently predicted last Fall and as detailed in the on-going world headlines, China continues to astound the astoundable, surprise the surpriseable, shock the shockable, beguile the beguileable, and attempt to educate the uneducateable as it rebounds from the unreboundable. We’ll see . . .

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Been catchin up on some of the posts here . . . excellent!

 

Also was was just over perusing at Uncle Jimmie’s site where he was addressing his CIGARs.

He’s discussing the potential pandemic’s effect on the economy.

 

“Government estimates are that from a mild to major pandemic the US GDP would drop 1 to 4 1/4%. Those figures are from the CBO May 2006 review. The question is what will happen to Federal Income Tax revenues in the same period. Assume the worst case scenario and a fall of more than 30% is quite possible. That suggests a Federal Budget deficit in the area of a mild $2.5 Trillion in 2009 to a severe pandemic and $7 trillion.”

 

I’m happy to see that Uncle has finally come around to the understanding that Gold will blow through his projected target of 1650. “Gold is going to Alf’s numbers (and Goober’s).” Yes grasshoppas, $10,000 /oz does sound crazy to the uninitiated, but it’s definitely in the realm of practical possibility. :rolleyes:

 

Too many deflationists still don’t understand that the gold price, the “real gold price” (gold in terms of real stuff/commodities, etc., not dollars) is an indicator of economic confidence. The deflationists maintain gold will perform poorly in an environment of economic malaise not realizing that Gold thrives from the consequences of the prescribed measures taken by the Fed to "cure" the economic weakness, and the resulting decline in confidence. We’ve been witnessing the Fed's response to the problems and will soon see the resulting consequences emerge. Eventually, from all the money creation, price inflation will take hold.

 

When the real gold price rises, it reflects the level of confidence in the financial system, those that govern it, and the economy. Conversely, when it falls it does so in an atmosphere of rising confidence.

 

In the past I posted a series of “yield curve” ratio charts to accurately demonstrate the above. Also I posted many “credit spreads” ratio charts that show the market’s appetite for junk or treasury bonds depending on the current state of affairs. For example, we witnessed the ratios plunge last fall as the credit spreads widened in response to the financial crisis. The chart I frequently posted “$ONE:$TED” was excellent at keeping investors abreast of market liquidity and as a consequence, projecting a bottom in stocks, particularly precious metals stocks which took of with a vengeance.

 

gooberoutfortheevening :)

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Well we are now working on our 4 th monthly candle

Looks like anything moderately down or moderately up is probable with june for an intermidiate peak

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gm, this place has been chugging along, and now your return has spruced it up!

fwiw, in my lifetime, i have never seen a bullmarket end in any way other than a parabolic blowoff. gold will be no different.

how that plays out is what makes markets interesting. i believe jim when he says"gold is your lifeline" certainly the debt plagued dollar will not be. i dont expect much in the way of price appreciation over the next 6 months , but after that be prepared. and i fully expect this summer to be another back the truck up event.

dharma

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gm, this place has been chugging along, and now your return has spruced it up!

fwiw, in my lifetime, i have never seen a bullmarket end in any way other than a parabolic blowoff. gold will be no different.

how that plays out is what makes markets interesting. i believe jim when he says"gold is your lifeline" certainly the debt plagued dollar will not be. i dont expect much in the way of price appreciation over the next 6 months , but after that be prepared. and i fully expect this summer to be another back the truck up event.

dharma

 

amen brother :)

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Candles:

 

The candlesticks on many miners are calling for a bounce.

 

A lot of doji's and homing pigeons. GDX has a bullish harami.

 

Volume was weak. I suspect it will be little more than a short term bounce.

 

Daily and weekly stochastics remain on sell signals.

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A couple charts

 

Bullish Rev. Head & Shoulders on GDX.

In the very short term, would like to see us get through major resistance @ 34 with ample volume.

 

Commodities fans, the Chinese economy continues to roar back to life, and its manufacturers are beginning to see inflation once again. More fuel for the PBOC letting the US Dollar peg continue adjusting at a higher rate.

 

China's manufacturing PMI rose for the fifth straight month in April to 53.5 from 52.4 in the prior month, which makes the second straight month that China’s manufacturing sector expanded. The employment component also rose 50.3 from 48.6, which was its first 50+ reading since last October, and the prices paid component rose to 51.3 percent from 48.3, which was its first 50+ reading since last September and indicates that Chinese raw material costs are rising.

 

Now for some math equations:

1. China’s economy recovers = more inflation pushed back on to the US from whence it came

 

2. Action in commodities, bond market, US Dollar, Australian Dollar, Canadian Dollar, etc., = Q1 -6.1% GDP contraction + I N F L A T I O N

 

Finally, the XAU/Gold ratio chart that has worked so well for us in the past, continues the trend of the shares outperforming the metal that has been in place since the October low.

 

The positive divergence between the shares and the metal relative to the March low also continues to remain intact. :D

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