Best of the Week
Most Popular
1. Stock Markets and the History Chart of the End of the World (With Presidential Cycles) - 28th Aug 20
2.Google, Apple, Amazon, Facebook... AI Tech Stocks Buying Levels and Valuations Q3 2020 - 31st Aug 20
3.The Inflation Mega-trend is Going Hyper! - 11th Sep 20
4.Is this the End of Capitalism? - 13th Sep 20
5.What's Driving Gold, Silver and What's Next? - 3rd Sep 20
6.QE4EVER! - 9th Sep 20
7.Gold Price Trend Forecast Analysis - Part1 - 7th Sep 20
8.The Fed May “Cause” The Next Stock Market Crash - 3rd Sep 20
9.Bitcoin Price Crash - You Will be Suprised What Happens Next - 7th Sep 20
10.NVIDIA Stock Price Soars on RTX 3000 Cornering the GPU Market for next 2 years! - 3rd Sep 20
Last 7 days
Who is Spreading the Virus? UK Coronavirus 2nd Wave Analysis - 30th Sep 20
Gold And Silver Follow Up & Future Predictions For 2020 & 2021 – Part II - 30th Sep 20
The Only Thing Systematic Is The Destruction Of America - 29th Sep 20
Fractional-Reserve Banking Is The Elephant In The Room - 29th Sep 20
Gold And Silver Follow Up & Future Predictions For 2020 & 2021 – Part I - 29th Sep 20
Stock Market Short-term Reversal - 29th Sep 20
How Trump co-opted the religious right and stacked the courts with conservatives - 29th Sep 20
Which RTX 3080 GPU to BUY and AVOID! Nvidia, Asus, MSI , Palit, Gigabyte, Zotac, MLCC vs POSCAPS - 29th Sep 20
Gold, Silver & HUI Stocks Big Pictures - 28th Sep 20
It’s Time to Dump Argentina’s Peso - 28th Sep 20
Gold Stocks Seasonal Plunge - 28th Sep 20
Why Did Precious Metals Get Clobbered Last Week? - 28th Sep 20
Is The Stock Market Dow Transportation Index Setting up a Topping Pattern? - 28th Sep 20
Gold Price Setting Up Just Like Before COVID-19 Breakdown – Get Ready! - 27th Sep 20
UK Coronavirus 2nd Wave SuperMarkets Panic Buying 2.0 Toilet Paper , Hand Sanitisers, Wipes... - 27th Sep 20
Gold, Dollar and Rates: A Correlated Story - 27th Sep 20
WARNING RTX 3080 AIB FLAWED Card's, Cheap Capacitor Arrays Prone to Failing Under Load! - 27th Sep 20
Boris Johnson Hits Coronavirus Panic Button Again, UK Accelerting Covid-19 Second Wave - 25th Sep 20
Precious Metals Trading Range Doing It’s Job to Confound Bulls and Bears Alike - 25th Sep 20
Gold and Silver Are Still Locked and Loaded… Don't be Out of Ammo - 25th Sep 20
Throwing the golden baby out with the covid bath water - Gold Wins - 25th Sep 20
A Look at the Perilous Psychology of Financial Market Bubbles - 25th Sep 20
Corona Strikes Back In Europe. Will It Boost Gold? - 25th Sep 20
How to Boost the Value of Your Home - 25th Sep 20
Key Time For Stock Markets: Bears Step Up or V-Shaped Bounce - 24th Sep 20
Five ways to recover the day after a good workout - 24th Sep 20
Global Stock Markets Break Hard To The Downside – Watch Support Levels - 23rd Sep 20
Beware of These Faulty “Inflation Protected” Investments - 23rd Sep 20
What’s Behind Dollar USDX Breakout? - 23rd Sep 20
Still More Room To Stock Market Downside In The Coming Weeks - 23rd Sep 20
Platinum And Palladium Set To Surge As Gold Breaks Higher - 23rd Sep 20
Key Gold Ratios to Other Markets - 23rd Sep 20
Watch Before Upgrading / Buying RTX 3000, RDNA2 - CPU vs GPU Bottlenecks - 23rd Sep 20
Online Elliott Wave Markets Trading Course Worth $129 for FREE! - 22nd Sep 20
Gold Price Overboughtness Risk - 22nd Sep 20
Central Banking Cartel Promises ZIRP Until at Least 2023 - 22nd Sep 20
Stock Market Correction Approaching Initial Objective - 22nd Sep 20
Silver Bulls Will Be Handsomely Rewarded - 21st Sep 20
Fed Will Not Hike Rates For Years. Gold Should Like It - 21st Sep 20
US Financial Market Forecasts and Elliott Wave Analysis Resources - 21st Sep 20
How to Avoid Currency Exchange Risk during COVID - 21st Sep 20
Crude Oil – A Slight Move Higher Has Not Reversed The Bearish Trend - 20th Sep 20
Do This Instead Of Trying To Find The “Next Amazon” - 20th Sep 20
5 Significant Benefits of the MT4 Trading Platform for Forex Traders - 20th Sep 20
A Warning of Economic Collapse - 20th Sep 20
The Connection Between Stocks and the Economy is not What Most Investors Think - 19th Sep 20
A Virus So Deadly, The Government Has to Test You to See If You Have It - 19th Sep 20
Will Lagarde and Mnuchin Push Gold Higher? - 19th Sep 20
RTX 3080 Mania, Ebay Scalpers Crazy Prices £62,000 Trollers Insane Bids for a £649 GPU! - 19th Sep 20
A Greater Economic Depression For The 21st Century - 19th Sep 20
The United Floor in Stocks - 19th Sep 20
Mobile Gaming Market Trends And The Expected Future Developments - 19th Sep 20
The S&P 500 appears ready to correct, and that is a good thing - 18th Sep 20
It’s Go Time for Gold Price! Next Stop $2,250 - 18th Sep 20
Forget AMD RDNA2 and Buy Nvidia RTX 3080 FE GPU's NOW Before Price - 18th Sep 20
Best Back to School / University Black Face Masks Quick and Easy from Amazon - 18th Sep 20
3 Types of Loans to Buy an Existing Business - 18th Sep 20
How to tell Budgie Gender, Male or Female Sex for Young and Mature Parakeets - 18th Sep 20
Fasten Your Seatbelts Stock Market Make Or Break – Big Trends Ahead - 17th Sep 20
Peak Financialism And Post-Capitalist Economics - 17th Sep 20
Challenges of Working from Home - 17th Sep 20
Sheffield Heading for Coronavirus Lockdown as Covid Deaths Pass 432 - 17th Sep 20
What Does this Valuable Gold Miners Indicator Say Now? - 16th Sep 20
President Trump and Crimes Against Humanity - 16th Sep 20
Slow Economic Recovery from CoronaVirus Unlikely to Impede Strong Demand for Metals - 16th Sep 20
Why the Knives Are Out for Trump’s Fed Critic Judy Shelton - 16th Sep 20
Operation Moonshot: Get Ready for Millions of New COVAIDS Positives in the UK! - 16th Sep 20
Stock Market Approaching Correction Objective - 15th Sep 20
Look at This Big Reminder of Stock Market Mania - 15th Sep 20
Three Key Principles for Successful Disruption Investors - 15th Sep 20
Billionaire Hedge Fund Manager Warns of 10% Inflation - 15th Sep 20
Gold Price Reaches $2,000 Amid Dollar Depreciation - 15th Sep 20
GLD, IAU Big Gold ETF Buying MIA - 14th Sep 20
Why Bill Gates Is Betting Millions on Synthetic Biology - 14th Sep 20
Stock Market SPY Expectations For The Rest Of September - 14th Sep 20
Gold Price Gann Angle Update - 14th Sep 20
Stock Market Recovery from the Sharp Correction Goes On - 14th Sep 20
Is this the End of Capitalism? - 13th Sep 20
The Silver Big Prize - 13th Sep 20
U.S. Shares Plunged. Is Gold Next? - 13th Sep 20
Why Are 7,500 Oil Barrels Floating on this London Lake? - 13th Sep 20
Sheffield 432 Covid-19 Deaths, Last City Centre Shop Before Next Lockdown - 13th Sep 20
Biden or Trump Will Keep The Money Spigots Open - 13th Sep 20
Gold And Silver Up, Down, Sideways, Up - 13th Sep 20

Market Oracle FREE Newsletter

How to Get Rich Investing in Stocks by Riding the Electron Wave

The Elusive Abyss, Debt Crisis and Gold Bull Far From Over

Stock-Markets / Financial Crash Aug 09, 2011 - 05:39 AM GMT

By: Neil_Charnock


Best Financial Markets Analysis ArticleFinancial markets are currently in a panic, bonds spiked last week (this continues at the moment), cash deposit levels up sharply according to BNY Mellon, US debt downgraded by Standard and Poor's from AAA to AA+ and equities crashing. The Chinese rating agency Dagong Global Credit Rating Co. have now lowered their rating on the US debt from A+ to A after lowering their previous US rating from AA to A+ in November 2010. All agencies are warning us that they are on "negative" in their forward view of their respective US ratings.

Here we are again back at the edge of the abyss ...yet again. This is not the first time we have not enjoyed this view of this elusive abyss and nor will it be the last unfortunately. This debt crisis is far from over and this Gold Bull is far from over.

Over 10 years ago Gordon Brown was rumoured to state that the reason he sold half (at the time) of the UK gold hoard was; "We stared into the abyss and were concerned that a sharply rising gold price would alert the world to the crisis that the world was facing. That is why we sold our gold". The bottom of the gold price in 1999 - 2001 is now known as the "Brown Bottom" in gold circles.

This now famous quote is the reason that you read the 'staring into the abyss' statement so much over recent times. It will remain popular for some time to come; it will surface every time we come back to the edge. The quote referred to here is actually very old. Friedrich Nietzche stated "Battle not with monsters lest ye become a monster; and if you gaze into the abyss the abyss gazes into you". It tells us that we can become what we fight if we are not extremely careful. This is a translation so allow me some slack here. These days we just talk about not liking what we see in the abyss and miss the relevance which is far more profound.

What do I mean by that statement?

Monetary authorities are there to do what they are doing and part of that purpose is to provide stability. They stare into this abyss at times like this wondering how to unwind this debt bubble with a soft landing - in other words with relative stability. This is impossible at this time so they "kick the can down the road". Please forgive this other much touted quote but it fits perfectly.

Unfortunately the authorities are working with irrelevant financial modelling based on; fixed exchange rates, different global dynamics and far lower levels of debt. They are also ill advised by those with vested interests. Unfortunately this leads them to add more debt to the mountain in the hope that this financial mess does not blow up on their watch (cynical view). Alternately they hope that growth will return or that the BRICS (Brazil, Russia, India, China and recently South Africa) will grow large enough and fast enough to absorb a major western slow down. At least this is the logic I am reading into their actions; perhaps I am wrong on this point.

They stare into the abyss and the fall is so unpalatable that they take drastic measures by pumping more and more money (debt) onto the pile. They are also maintaining official rates way below real price inflation; thereby pushing the debt bubble way past the point of no return. This awful fact has now reached a wider audience's attention thanks to the debt ceiling debacle and recent events in Europe. Sooner or later the Piper has to be paid guys - the debt mountain will implode if you keep adding stimulus. Their ability to add more QE is diminishing. The irony is that they are not only leading us into "that which they are trying to fight" they are also making the abyss bigger and bigger every time they back us away from this elusive yet unavoidable consequence. The can kicking is all about containment, their dilemma is when do you let go?

Where are we now?

Now back to the current situation and the big question for investors at the moment which is... "are we there yet"? Do we fall into the abyss right now or back away yet again? You have to look at history to see the clear trend here because it is stark. We have faced this situation many times in the past and the authorities step in again every time. Many commentators believe this will keep happening until it is no longer viable, i.e. not their choice. I am in this camp.

The actual leap or fall into that abyss will eventually happen when the debt maturity profiles in the bond markets converge and coincide with a total loss of confidence. To put it another way, we go over the edge when we finally face a much larger version of what you now see with Greece (see the extent of the situation in the Greek 2, 5 and 10 year bond rates below). Alternatively "it" happens when a rogue wave event of sufficient magnitude hits the markets and the panic cannot be contained.

We are seeing a significant yet partial loss of confidence now as a wider group of investors wake up. This is not a total loss of confidence. Fears of the debt contagion spread to Italy in recent weeks, the US has been downgraded as expected by the market but this is largely factored in now. The gold community have long wondered how long the AAA Rating could possibly last so this is no surprise to us. A few weeks back I was looking at Greece and telling subscribers that it could not be allowed to fail at this point because of the counter party risk throughout Europe. Total collapse is possible if this develops too far right now so this fire will have be extinguished as well. With gold up $48 an ounce as I speak you have to wonder when the next major intervention will be announced.

There is a lot to the can kicking (and why) which I cannot cover in the limited scope of this article so I will just point out the following facts and let your mind do the rest. German and French banks are not rolling over most of their Portuguese, Irish, Spanish, Italian or Greek Bonds, or second tier corporate debt from these countries. When maturity falls due they redeem (take the cash) and this is why we have seen 10 Year Greek bonds rise to 14.875%. One month ago the same Greek bonds were at 16.2% and this implies that there is little interest; an extremely high price is being paid for new funds to rollover old debt.

Shorter term debt is even worse, 5 Year Bonds at a whopping 22.666% and 2 Year are at 32.594%. A default is factored in. Portugal is at 12.1%, 13.6% and 12.75% for 10 Year, 5 Year and 2 Year Bonds which is shocking but not yet at certain default levels. Italy is not great however it is nowhere near as bad at 5.93%, 5.23% and 4.5% for 10 Year, 5 Year and 2 Year Bonds.

The banks are going home, they renew local debt (own country) and will avoid the rest but they still need more time to reduce this risk. This debt crisis is also a banking crisis and there is also unacceptable debt default risk exposure in the insurance industry. The same applies to Bond Funds and the giant Sovereign funds.

Just as I told you Greece would not fail, I again lean towards the view that this current crisis of confidence will get stamped out again to some degree. Spain and Italy have been involved in rescue bond purchases of Greece and Ireland which I find quite bazaar, yet such is the cooperation to contain this crisis at this stage. Now their Bond yields have been increasing, so their own repayment burden becomes even less sustainable. This has come to the attention of the market at great concern to the ECB which has now stepped in and offered to buy Italian and Spanish bonds to contain the risk. Yields have already come off a little as a result.

The whole notion of "sustainable growth" will come into disrepute by the time this crisis is over. Debt will become a dirty word too as the world realizes you can't print wealth and that they cannot turbo-boost growth with huge gobs of debt and call it a success.

The world will not end when we go into the abyss however politicians will not fix the mess until we fall over the edge either. Then they will be forced to do something realistic on their own watch. So where are we now? Let's take a look at some interesting charts before I sign off.

Here is the 5 year / weekly 10 year US Bond Rate chart. I lifted it from the recent GoldOz Newsletter and you can see the last two times the yield was smashed as hard as this we soon went into reverse. This creates a massive capital wave that has to find a home, so where does it go?

You will notice the RSI is heavily oversold on the Bond chart (upper) however there is a little room for more downside compared to last August 2010 - but we are very close. As a bond trader you just don't want to sit here at the moment you want to take your profits now. Bonds are looking very expensive so perhaps the flight to safety has been overdone right now.

The probability is now that the bonds form a reversal formation soon and reverse. In the chart above I highlighted last August for an important reason. One place the capital wave finds itself going is equities.

I have included the weekly chart of the XGD below and what do we see from August 2010? This anniversary is obvious; here we can break out from the latest green ellipse into a new upside rally with the leading gold stocks ahead of the charge. The exact date for the last blast off point to the upside is later this week. Further correlation of this phenomenon can be seen back in December 2008 when Bonds were at the last major low; this is when the XGD took off as well.

Will it happen again this time? There is no guarantee, just as there is no guarantee the XGD will not fall back to the 7000 level or below. These stocks are extremely cheap relative to gold and getting cheaper, stretching that invisible elastic band of value off the charts. Gold stocks are undated options on the future gold price. They present excellent value as leveraged investments into the gold market and if you pick the larger unhedged profitable producers with a growth profile the risk is lower. This investment class is extremely attractive now. Anyway here is the XGD chart and the correlation to the bond prices.

The US currently has a moderately growing economy, well below the longer term average. Pimco have been saying however that this long term average growth rate is gone and they are obviously right. The old growth rates were boosted by the long term debt binge as we (collectively) built the debt bubble. As the bubble stops' expanding it begins to contract and this is called deleveraging. This slows growth and Pimco now calls this the "new normal". Therefore it is a mistake to assume that flattening growth is the old "stall speed". No it isn't the old "stall speed" it is the new normal. Low growth rates will become very acceptable once investors adjust to this new normal.

What will reverse the markets right now? Hard to say but I await the latest edition of the greatest show on Earth, the finance markets. We still have our special discount offer on Gold Membership if anybody has interest. Now the AUD: USD ratio is back in the support range it is certainly a better time for US dollar holders to invest in our gold stocks.

Good trading / investing.

Neil Charnock

GoldOz has now introduced a major point of difference to many services.  We offer a Newsletter, data base and gold stock comparison tools plus special interest files on gold companies and investment topics.  We have expertise in debt markets and gold equities which gives us a strong edge as independent analysts and market commentators.  GoldOz also has free access area on the history of gold, links to Australian gold stocks and miners plus many other resources.

Neil Charnock is not a registered investment advisor. He is an experienced private investor who, in addition to his essay publication offerings, has now assembled a highly experienced panel to assist in the presentation of various research information services. The opinions and statements made in the above publication are the result of extensive research and are believed to be accurate and from reliable sources. The contents are his current opinion only, further more conditions may cause these opinions to change without notice. The insights herein published are made solely for international and educational purposes. The contents in this publication are not to be construed as solicitation or recommendation to be used for formulation of investment decisions in any type of market whatsoever. WARNING share market investment or speculation is a high risk activity. Investors enter such activity at their own risk and must conduct their own due diligence to research and verify all aspects of any investment decision, if necessary seeking competent professional assistance.

Neil Charnock Archive

© 2005-2019 - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.

Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules