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Round numbers are important.  Gold closed ABOVE $1650 today.  Let’s take every small victory we can.

Andy Schectman, Andy Hoffman and Michael Spector are out of the office all week, in San Diego at the Casey Conference.  Ranting Andy is still writing from San Diego.

The Cartel is busy at work again this morning.  It’s like the movie “Groundhog Day,” the same thing happens over and over again.  But don’t worry, unlike the movie, this will come to an end.

Last night a wealthy friend, who spends all his waking hours “worrying” and tries to trade gold and silver, sent me the following email.

David,

My feelings for what they’re worth, If Larry Edelson’s right, the Cartel can bring the Gold / Silver market down to say $ 1480 for Gold and $25.00 Silver.  They probably feel that they can end “THE BULL RUN”!  $2000 year-end Gold ?  Lotsa luck. . .

Mark

Mark thinks it’s as easy as listening to Larry Edelson.  Here is my response to Mark:

MARK,

I DON’T TRADE MY PHYSICALS.  I EXPECT GOLD TO BE AT OR ABOVE $2000 AND SILVER TO BE AROUND $50 BY YEARS END, SO THIS IS A NON-EVENT.

I OFTEN TALK WITH MY FRIEND, DAVID R.  DAVID IS PROBABLY ONE OF, IF NOT THE MOST SUCCESSFUL PRECIOUS METALS TRADER IN AMERICA.  HE HEADED UP TRADING DEPARTMENTS FOR SEVERAL BULLION BANKS IN JOHANNESBERG.  HE WORKED IN THE TRADING DEPARTMENT AT BARCLAYS IN LONDON FOR A YEAR OR TWO.  HE RAN THE TRADING DEPARTMENT FOR A MULTI-BILLION DOLLAR PRIVATELY OWNED HEDGE FUND IN NEW YORK CITY AND WAS IN CHARGE OF DOZENS OF THE MOST TALENTED METALS TRADERS IN MANHATTAN.  LAST YEAR HE LEFT AND NOW TRADES FULLTIME FOR A VERY WEALTHY INVESTOR AND HIMSELF.

SEVERAL WEEKS AGO HE ASKED ME IF I WANTED TO ACCOMPANY HIM TO LONDON TO SEE JPMORGAN’S PRECIOUS METALS TRADING DEPARTMENT AND SILVER STORAGE IN LONDON.  HE WAS GOING TO VISIT FRIENDS OF HIS THERE, AND OFFERED TO TAKE ME ALONG IF I WAS INTERESTED.  DAVID CAN CALL UP THE HEAD OF THE CENTRAL BANK OF RUSSIA OR CHINA AND SPEAK TO THEM PERSONALLY.  HE ISN’T WORRIED ABOUT GOLD, WHY ARE YOU?   SIMPLE.  YOU ALWAYS LIKE TO WORRY AND GET IN OVER YOUR HEAD IN AREAS YOU SHOULDN’T.

TAKE THIS FRIENDLY ADVICE —

WHEN BERNANKE SAID HE WOULD NOT RAISE INTEREST RATES FOR THREE YEARS, DAVID CALLED ME AND SIMPLY SAID, “YOU MUST BE LONG GOLD NOW FOR THREE YEARS, MINIMUM!”  EDELSON AND THE REST OF THE NEWSLETTER WRITERS ARE AMATEURS!  DAVID R. IS THE BEST OF THE BEST.  HE IS A PROFESSIONAL’S PROFESSIONAL.  HE MAKES A RIDICULOUS LIVING TRADING METALS, NOT SELLING NEWSLETTERS.

YOU HAVE SEEN THE “SIMPLE” CHARTS LARRY USES.  I WILL SHOW YOU THE TYPE OF DATA THAT DAVID R. USES.  (BY THE WAY, EDELSON IS VERY BULLISH ON GOLD AND SILVER AFTER THIS CORRECTION.)  DAVID R. DOES NOT EXPECT TO SEE ANYWHERE NEAR EDELSON’S NUMBERS.  HE SAYS THERE IS STRONG SUPPORT IN THE MID $1550’S AND A DIP SHOULD BOTTOM OUT AT WORST, JUST A BIT BELOW $1600.  A DROP OF JUST THREE OR FOUR PERCENT FROM HERE, SHOULD BE THE MOST GOLD WOULD FALL.

YOU ARE A CHILD PLAYING A GAME WITH OLD EXPERIENCED PROS.

HERE ARE MY LAST TWO EMAILS FROM DAVID R. –  BUT THE BOTTOM LINE IS, YOU SHOULD NOT BE TRADING GOLD AND SILVER.  YOU ARE WAY, WAY, WAY OUT OF YOUR LEAGUE.  I KNOW BETTER, AND SIMPLY DO AS JIM SINCLAIR AND RICHARD RUSSEL SUGGEST; I BUY PHYSICALS, DO NOT MARGIN OR LEVERAGE, TAKE POSESSION AND SIT TIGHT.

REMEMBER, THERE ARE THREE MORE YEARS MINIMUM, AND PROBABLY FIVE MORE LEFT IN THE GOLD AND SILVER BULL MARKET.  WE HAVEN’T EVEN SEEN THE REAL “ACTION” YET, WHEN THE PRICES ENTER STAGE THREE AND GO VERTICAL!

HERE ARE DAVID R’S TWO MOST RECENT EMAILS TO ME:

E-mail 1:

Two things to note on the relationship between Treasuries and Gold:

1. Gold thrives off a flattening curvebut a steepening curve is not necessarily very bearish Gold – historically it tends to keep Gold prices trading sideways…

The 2 most recent flattening instances were 4Q 2008 (Gold jumped 37%) and 3Q 2011 (Gold jumped 27%). However, the inverse is not necessarily very bearish. The 2 recent instances where the curve steepened dramatically (both times it steepened by  > 40%) was:

a. March ’09-June ’09; post QE1: Gold was very sluggish; it didn’t selloff and remained largely stuck in a $100 range around $900

b. Oct ’10  – Feb ’11 (in the runup to and after QE2): Gold again remained rangebound in the $1300s.

2. Well put WSJ (article below “Bond Bear Market Yet to Roar” ) recalling that “bonds are moving from panic levels to a new range between 2.10% and 2.60%”. Yes, all safehavens have been hurt, and mirroring this, Golds simply moved out of ‘panic mode’ and repriced lower reflecting a rosier outlook. There’s no need to overdramatize the correction (just yet).  It notes: “The true bear bond market will get under way when investors start to believe that central banks are going to raise rates and withdraw liquidity or that their attempts to keep rates artificially low are fueling the risk of meaningful inflation. So far, the bond market dam has cracked, not burst” – a rate hike will kill two birds; Gold & Treasuries. Fears over inflation will tear them apart & prompt a divergence between bonds and Gold. FWIW: the 1994 unexpected rate hike did very little to the Gold market (which was a very different animal back then – Gold remained in  a$25 range sub $400 (graph 2)

*specifically the 10-2yr

Panel 1: Yield curve* (10-2year) vs Gold

Panel 2: Yield curve (30-2)

10 year Treasuries vs Gold

—–Original Message—–

Heard on the Street, by Richard Barley

from The Wall Street Journal

Is the bond bear market here? Some are recalling the events of 1994, when an unexpected U.S. rate increase caused bond-market carnage.

http://online.wsj.com/article/SB10001424052702303812904577291770173587542.html?mod=djemheard_t

________________________________________________________

Bond Bear Market Yet to Roar .Article Comments more in Heard on the Street |

By RICHARD BARLEY

Is the bond bear market here? Last week’s sudden selloff in U.S. Treasurys, which dragged U.K. gilts and German bunds in its wake, has jolted the market. The driving force is a belief the U.S. and global recovery may be becoming self-sustaining.

Some are recalling the events of 1994, when an unexpected U.S. rate increase caused bond-market carnage. But so far, a rerun looks unlikely given that a sharp rise in rates would in itself put pressure on the nascent recovery. That should reassure investors in risky assets like stocks and junk bonds.

Ten-year Treasury yields have risen 0.36 percentage point in a week to 2.38%—in bond-market terms, a big move. That came after healthy U.S. employment growth, the majority of U.S. banks passing a severe “stress test” and the market dialing back expectations for more quantitative easing by the Federal Reserve.

The crucial question is how far yields might rise. That depends in large part on U.S. economic data. Further evidence that the U.S. recovery is gaining traction—in particular corporate spending, further job creation and rising household incomes—is bound to push yields higher. By one measure, they could rise sharply: Ten-year Treasurys were well above 4% the last time the S&P 500 was at its current level in mid-2008. That steep a rise would rival 1994’s selloff—when 10-year yields rose to 8% from 5.9%—and could threaten the recovery in housing and the economy.

But many investors, disappointed by false dawns in recent years, may be slow to unload bonds. The euro zone and Middle East in particular still pose risks to the global economy. Interest rates are at zero, anchoring short-dated yields. Policy makers have expended much effort driving down long-term yields, and may yet seek to contain them. That may mean 10-year Treasury yields are just moving from panic levels to a new range between 2.10% and 2.60% for now. German bunds, meanwhile, look more insulated because of the lingering euro-zone crisis. Even after rising to 2.03%, 10-year bund yields remain well within their recent trading range. So investors could bet bunds outperform Treasurys.

For stock and corporate-bond investors, it is too early to panic about rising yields. History suggests 10-year government-bond yields need to rise over 4% before threatening to choke off corporate investment, HSBC notes. High-yield bonds should benefit from better growth prospects. Investment-grade bonds may face greater headwinds, however, as spreads tighten and more of their performance is driven by underlying government-bond yields.

The true bear bond market will get under way when investors start to believe that central banks are going to raise rates and withdraw liquidity or that their attempts to keep rates artificially low are fueling the risk of meaningful inflation. So far, the bond market dam has cracked, not burst

__________________________________________________________

E-mail 2

Its been a little over 6months since Gold reached it record high of $1921 on September 6th 2011.

Its roughly trading $260 below this peak (13.5%).

Table1 below simply recaps where other assets are trading relative to Golds peak back then (in an attempt to see if relative performances clues us in on investor sentiment, macro trends etc.).

Graph 1 then compares the current fall from grace to the 1980s, from a purely technical perspective

(note: we’re working on sending out a broader big picture piece looking at 1980s vs. today).

 

  Performance since Gold’s peak (Sept 2011)
Silver

-21.70%

DXY

4.60%

Platinum

-9.30%

Palladium

-6.30%

S&P

21.10%

VIX

-60.00%

EUR

-5.40%

Copper

-4.10%

TYA

-1.60%

 

Panel 1: Gold’s runup to peak in Jan 1980 of $850,

Panel 2: (lagged), Gold’s runup to 2011 Sept peak of $1921

(both showing 6month performance)

Table 1 notes:

BEST ‘N WORST PRECIOUS PERFORMANCES:

–          Surprisingly, Palladium is the best performing precious metal since Gold’s peak and has only shed 6.3%. Its resilience deserves credit.

–          Another surprise is Silver, which is trading in bear market territory since Gold’s peak. Essentially, Silver & S&P have traded places – S&P is up 21%, while Silver is down 22%. Silver has clearly picked  the “precious” over “industrial” route and isn’t trading inline with other risk-on/growth story assets. Many overlook what happened in April/May 2011 – the tragic deleveraging scared off a large part of the investor community. Chart 2 (Gold in 1980 matched up with Silver in April 2011) certainly is bubble’esque – -it took decades for Gold to recover from its 1980 episode

–          Silvers the oversold precious but with a dreadful history; Palladium has shown incredible spirit – so with a solid “growth-on” story ensuing & stabilizing Gold/Silver prices, the latter should surely should  attract some investor interest. 

FACTORING IN THE EFFECT OF A STRONG USD

–          The USD only appreciated 4.6% since Gold’s peak (Eur is dn 5.4%), resulting in a > 13% selloff in Gold! At face value (discounting the change in investor appetite, see below), Gold is more elastic to currency swings /USD strength than initially thought. Graph 3 shows other instances when DXY remained lodged above 80  Gold was around $1650 in December ’11, and $1400 in December 2010. IN June 2010, DXY was flying (ranging 81 to > 88), & Gold was $1200.   There’s clearly downside potential (at least a probe through $1600) should the USD find its 2nd wind.  (NOTE, DAVID R. SAYS THROUGH $1600, NOT EDELSONS NONESENSE OF $1400S.  NOT ENOUGH POTENTIAL DROP TO MAKE IT WORTH SELLING OUT AND PAYING CAPITAL GAINS AND MOVING INTO SHORT-TERM TRADING)

 

SAFEHAVENS (TYA & VIX) vs. “RISK-ON/GROWTH-ON” ASSETS

–          The stellar dropoff in VIX since Gold’s peak (down 60%; now at 5yr lows) clearly shows investors see no need for protection, and have fallen out of love with most safehavens.

–          The resilience of thee industrial (Pall and Copper) over thee Precious (platinum, & Gold) metals confirms the move into riskier/”growth-on” type assets.  Silver is the odd man out; trading as a precious and worse than Gold.

–          Despite the recent (stellar) rise in yields, US (10yr) Treasuries is  still the only asset not to have wandered too far off from price levels in Sept 2011/ Gold’s peak. TYA is currently down only 1.6%. Many believe bond yields have further to rise, & US equities still have legs / momentum. With safehavens hit across the board (JPY, CHF, Gold,) Treasuries haven’t fallen as much as their peers in this 2month time frame. Any continuation of the bond unwind into equities will put the brakes on a potential upswing in Gold (ie: TYA at 1Year lows sub 120, puts Gold sub $1500; graph 2).

 

Graph 1 notes: Comparing Gold’s 1980 peak to 2011 peak:

–          Recently, it took 6months for Gold to correct > 13%; back in 1980 it only took one day (from $850 on Jan 21st to $737.50 on Jan 22nd)! Yes, something can be said about notional prices – Gold’s currently well over double the price it was in 1980. Whiles it isn’t unusual for Gold to drop over > $100 in recent times (in 1980 a  >13% fall), its very unlikely Gold falls 13% in 1day (which is well > $200).

–          Put another way, in 1980, Gold prices fell 27% in 6months (+-double as much as what’s its fallen the past 6months). 1980 was parabolic; a bubble that burst (just look at vol, which spiked over 66 then, but was pinned at 20 during the September 2011 peak). The recent runup and subsequent 6month fall is not as cataclysmic as 1980; its been a series of lower lows, a slow bleed

*3m historical

2. Bubbles?: Silver peak in 2011 ‘matched up’ with Gold peak in 1980

3.Gold and DXY (showing periods when its > 80)

4. Gold and TYA: