Thoughts on Gold

October 28, 2012
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Grant Williams put out a very good presentation on the bond bubble/mania and a prospective gold bubble.  Of course I most certainly agree about the bond bubble, but Williams also offers up the plausible theory that once the bond bubble bursts it would also set off a central bank lead fear driven panic into gold and launch a parabolic mania phase. Williams now sees gold as being late in the awareness phase.

 

I have no strong conviction that a gold mania phase will necessarily occur, but if one did, it would likely center around a huge collapse of false confidence in what I’ve called the sistema.  In my view gold has been manipulated by the sistema, especially given the psychological hit that would be taken should gold really get out of the bag.  Therefore as long as the sistema can effectively operate, gold will stay generally repressed.  I think the sistema’s  reign is on a short fuse, and once confidence is ultimately shattered then we will have a new ball game.

Once factor that will bust up the sistema and the bond market is continued excess money printing which has negative consequences for the real economy and real people. Inflation expectation were already two standard deviations outside the band even before QE3 hits.

Until that point, gold is trading around a negative correlation with the dollar. I see the USD as neutral, and in fact feel the USD could rally against the Euro short term.  In the near term I feel the election will be a factor, at least as far as the initial response. The consensus is that a Romney win will result in a bit harder money and perhaps the appointment of John Taylor to replace Bernanke. Secondly despite the fact that Romney leads in five out of six of the most recent polls, the odds makers are putting on 64-36 odds he loses. I agree with the consensus on the market reaction to a Romney victory, but I put the odds of him winning closer to 50-50, not 64-36. I see Obama voters as a mile wide and an inch deep.

Source: Real Clear Politics, first number is Romney

Therefore a Romney win would be a bit of a market surprise. The initial reaction might be a USD rally especially against the Euro taking gold down to long term support, which would be about 158 on GLD or $80 down from here. That would be temporary because I don’t see Romney going the Taylor route, he will pick bankster sycophants instead.  Secondly it will be awhile before Romney can have an impact on Fed policy and Fed members.

Should Obama win, as consensus believes, gold could rally, but there is resistance nearby overhead at about $168.37.  To me this suggests the pre-election skew is GLD 157.93-168.37.

-My commentary on how to trade this is available at Actionable. Subscription information can be seen in the right hand column.

 

 

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