Best of the Week
Most Popular
1. US Housing Market Real Estate Crash The Next Shoe To Drop – Part II - Chris_Vermeulen
2.The Coronavirus Greatest Economic Depression in History? - Nadeem_Walayat
3.US Real Estate Housing Market Crash Is The Next Shoe To Drop - Chris_Vermeulen
4.Coronavirus Stock Market Trend Implications and AI Mega-trend Stocks Buying Levels - Nadeem_Walayat
5. Are Coronavirus Death Statistics Exaggerated? Worse than Seasonal Flu or Not?- Nadeem_Walayat
6.Coronavirus Stock Market Trend Implications, Global Recession and AI Stocks Buying Levels - Nadeem_Walayat
7.US Fourth Turning Accelerating Towards Debt Climax - James_Quinn
8.Dow Stock Market Trend Analysis and Forecast - Nadeem_Walayat
9.Britain's FAKE Coronavirus Death Statistics Exposed - Nadeem_Walayat
10.Commodity Markets Crash Catastrophe Charts - Rambus_Chartology
Last 7 days
Gold’s Major Reversal to Create the “Handle” - 5th July 20
Gold Market Manipulation And The Federal Reserve - 5th July 20
Overclockers UK Custom Build PC Review - 1. Ordering / Stock Issues - 5th July 20
How to Bond With Your Budgie / Parakeet With Morning Song and Dance - 5th July 20
Silver Price Trend Forecast Summer 2020 - 3rd Jul 20
Silver Market Is at a Critical Juncture - 3rd Jul 20
Gold Stocks Breakout Not Confirmed Yet - 3rd Jul 20
Coronavirus Strikes Back. But Force Is Strong With Gold - 3rd Jul 20
Stock Market Russell 2000 Gaps Present Real Targets - 3rd Jul 20
Johnson & Johnson (JNJ) Big Pharma Stock for Machine Learning Life Extension Investing - 2nd Jul 20
All Eyes on Markets to Get a Refreshed Outlook - 2nd Jul 20
The Darkening Clouds on the Stock Market S&P 500 Horizon - 2nd Jul 20
US Fourth Turning Reaches Boiling Point as America Bends its Knee - 2nd Jul 20
After 2nd Quarter Economic Carnage, the Quest for Philippine Recovery - 2nd Jul 20
Gold Completes Another Washout Rotation – Here We Go - 2nd Jul 20
Roosevelt 2.0 and ‘here, hold my beer' - 2nd Jul 20
U.S. Dollar: When Almost Everyone Is Bearish... - 1st Jul 20
Politicians Prepare New Money Drops as US Dollar Weakens - 1st Jul 20
Gold Stocks Still Undervalued - 1st Jul 20
High Premiums in Physical Gold Market: Scam or Supply Crisis? - 1st Jul 20
US Stock Markets Enter Parabolic Price Move - 1st Jul 20
In The Year 2025 If Fiat Currency Can Survive - 30th Jun 20
Gold Likes the IMF Predicting a Deeper Recession - 30th Jun 20
Silver Is Still Cheap For Now - 30th Jun 20
More Stock Market Selling Ahead - 30th Jun 20
Trending Ecommerce Sites in 2020 - 30th Jun 20
Stock Market S&P 500 Approaching the Precipice - 29th Jun 20
APPLE Tech Stock for Investing to Profit from the Machine Learning Mega trend - 29th Jun 20
Student / Gamer Custom System Build June 2020 Proving Impossible - Overclockers UK - 29th Jun 20
US Dollar with Ney and Gann Angles - 29th Jun 20
Europe's Banking Sector: When (and Why) the Rout Really Began - 29th Jun 20
Will People Accept Rampant Inflation? Hell, No! - 29th Jun 20
Gold & Silver Begin The Move To New All-Time Highs - 29th Jun 20
US Stock Market Enters Parabolic Price Move – Be Prepared - 29th Jun 20
Meet BlackRock, the New Great Vampire Squid - 28th Jun 20
Stock Market S&P 500 Approaching a Defining Moment - 28th Jun 20
U.S. Long Bond: Let's Review the "Upward Point of Exhaustion" - 27th Jun 20
Gold, Copper and Silver are Must-own Metals - 27th Jun 20
Why People Have Always Held Gold - 27th Jun 20
Crude Oil Price Meets Key Resistance - 27th Jun 20
INTEL x86 Chip Giant Stock Targets Artificial Intelligence and Quantum Computing for 2020's Growth - 25th Jun 20
Gold’s Long-term Turning Point is Here - 25th Jun 20
Hainan’s ASEAN Future and Dark Clouds Over Hong Kong - 25th Jun 20
Silver Price Trend Analysis - 24th Jun 20
A Stealth Stocks Double Dip or Bear Market Has Started - 24th Jun 20
Trillion-dollar US infrastructure plan will draw in plenty of metal - 24th Jun 20
WARNING: The U.S. Banking System ISN’T as Strong as Advertised - 24th Jun 20
All That Glitters When the World Jitters is Probably Gold - 24th Jun 20
Making Sense of Crude Oil Price Narrow Trading Range - 23rd Jun 20
Elon Musk Mocks Nikola Motors as “Dumb.” Is He Right? - 23rd Jun 20
MICROSOFT Transforming from PC Software to Cloud Services AI, Deep Learning Giant - 23rd Jun 20
Stock Market Decline Resumes - 22nd Jun 20
Excellent Silver Seasonal Buying Opportunity Lies Directly Ahead - 22nd Jun 20
Where is the US Dollar trend headed ? - 22nd Jun 20
Most Shoppers have Stopped Following Supermarket Arrows, is Coughing the New Racism? - 22nd Jun 20

Market Oracle FREE Newsletter

AI Stocks 2020-2035 15 Year Trend Forecast

Gold Stocks a Buy!

Commodities / Gold & Silver Stocks Dec 07, 2008 - 09:42 AM GMT

By: Brian_Bloom


Diamond Rated - Best Financial Markets Analysis ArticleAs these words are being written, there are two extraordinarily worrying facts in the world's financial markets:

•  There has been a continuing  “flight to safety” of capital – as evidenced by a collapse in the 30 year and 10 year yields shown in the charts below (courtesy and respectively)

•  There currently exists a backwardation in the gold price. This latter fact was kindly brought to my attention in an email from Professor Antal Fekete. (Note: “Backwardation” means that the price of gold for immediate delivery is higher than the price for future delivery as quoted on Comex. This is the first time in history that this has happened according to Professor Fekete)

Of course, from a “trading” perspective, one shouldn't get carried away by the two charts above – both of which are seriously oversold. As can be seen from the oscillators on daily chart below the ten year yield is due for a bounce and a similar situation is visible on the daily chart of the 30 year yield.

In context of the above charts, I have to admit that when I first read Antal's argument on backwardation, I thought he had gotten it wrong. It seemed to me that both the collapse in yields and the backwardation in the gold price were signs of coming deflation. After all, it seemed quite logical to me that the most likely explanation of the future price of gold being lower than the current price would be if the market was expecting a fall in prices across the board.

Regular readers will be aware that I have been talking for several months about a slowing velocity of money being the most dangerous economic symptom we might expect.  In an article dated February 18 th 2008 (see I gave the following example:

“The evidence is now mounting that Peak Oil has passed, and volumes of oil throughput being processed by the oil refineries in the West may be contracting. Exxon's volumes contracted very slightly last year and Shell recently announced that its volumes had fallen from the budgeted 3.8 million barrels per day of oil equivalent to 3.315 million bpd


…. “the reader's attention is drawn to the simplistic table below, which shows the impact of a price rise from $75 a barrel to $100 a barrel in the markets, and the impact on profitability of an oil business that was previously earning 25% return on revenue, and marks up 75%. In the first case I have assumed sales of 1,000 barrels and in the second case I have assumed that volumes contract by 5%.

Cost Per Barrel            $75               $100 
Mark-Up 75%                  $56              $75 
Price per barrel           $131            $175 

Number of Barrels       1000            950 

Total Revenue             $131,250     $166,250 
Less: Expenses          $98,438        $103,359 (*)
Net Pre Tax Profit      $32,813       $62,891 
Profit:Sales %             25%               38% 

(*) Assuming 5% inflation 

What this table shows is that, even factoring inflation into the annual expenses, return on revenue rises in both dollar and percentage terms, thereby masking the fall in volume throughput.”

In an article I published the week prior (February 12 th 2008), I had unequivocally called the beginning of the next leg of the Primary Bear Market : “Despite many conflicting signals from many different quarters, this analyst believes we have entered a Primary Bear Market for Industrial Equities.” (See: )

Against this background, when I read Antal's articles on Backwardation I just naturally assumed that it would be explained by an anticipation by the markets of a coming era of deflation.

And then I thought: Hang on a second, Bloom.  Antal is an exceptionally bright guy who is careful about the statements that he makes. Make sure you understand exactly what he is talking about before you allow your prejudices to show.

And then I remembered a couple of very odd looking charts that I had seen a few days prior, and the penny dropped. Antal is probably correct.

First, let's understand his argument regarding the most likely reason for backwardation.

My understanding of what he is arguing is that current holders of gold bullion are refusing to part with their gold and that – because of this – Comex is facing a rising probability that it will default on orders for delivery at the end of December or, at the latest, March 2009. For example, if you were a professional trader faced with backwardation, you would naturally sell short now – in the knowledge that you can buy for delivery later at a lower price. But this does not appear to be happening. The reason the price of gold for future delivery is lower, Antal seems to be arguing, is that investors are losing faith in the integrity of the futures market for gold.  Investors do not believe that Comex will be in a position to honour its obligations.

This argument is validated by the fact that the Perth Mint – to name but one example – has closed its order book. To quote Mr Ron Currie in an interview published on November 21 st 2008: “…the Perth Mint is not the only producer under pressure. According to the World Gold Council, over the past year worldwide coin sales have increased by 60 per cent, bar hoarding has gone up by 69 per cent while retail spending on gold jewellery has increased by 121 per cent.” (source:

So, if demand exceeds supply, maybe my deflation explanation doesn't stack up in respect of the gold price Backwardation. If Antal is right about demand exceeding supply then there shouldn't be a Backwardation in Gold there should be a Contango (Future price should be greater than price for current delivery).

Okay. With my mind now open to the possibility that Antal may be correct, I had another look at the charts that were looking so strange to me a few weeks ago. They are all “Relative Strength” charts; courtesy )

In the week ending November 17 th , the ratio of the 30 year yield and the Standard and Poor Index peaked, and then collapsed – in the process forming a “gap island reversal” formation.

This is consistent with the idea of a coming era of deflation, and is validated by a breakdown in the ratio of the Commodities Index to the Standard and Poor Index (see next chart).

Note the “gap” at point C when the price sliced below the neckline of the Head and Shoulders reversal formation

Okay, so far, everything stacks up:  But, if we are heading for deflation, and if gold is just another commodity (as I have been arguing for some time), then we would expect a breakdown of gold relative to the Standard and Poor Index. Well, the fact is that this did not happen and I have long ago learned that one should never argue with facts.

The above is a very interesting chart because the oscillator is showing three non-confirmations with price. E is lower than D whilst B is higher than A;  F is higher than E whilst C is lower than B; and F is lower than D whilst C is higher than A.

On balance, the technicals show that the gold price has probably peaked relative to the Industrial Index – for the time being – and is also unlikely to collapse relative to Industrials

Of considerable interest, this is not consistent with the argument which expects a coming era of deflation and argues that gold is just another commodity. Something seems to have changed.


What has changed is the relationship of gold shares to the gold price – as can be seen from the Relative Strength chart below.

This is a very important chart, in my view, in that it is signaling a possible change in the way the market is perceiving gold. Yes, the gold price may have peaked relative to the Industrial markets for the time being, but Professor Antal Fekete may be dead right! One reason the gold price seems to be wallowing may be that the normal market processes may be breaking down.


That may be why the gold shares are looking like they want to strengthen relative to gold.

The picture becomes somewhat clearer when we look at the ratio of the $XAU to the gold price on a 3% X 3 box reversal Point and Figure Chart (courtesy )

Note how the ratio gave a tentative buy signal when it reached 12.41.

Note also the bullish non confirmation on the chart below – where the oscillator has reached a higher high than C – at point D – whilst the high on the chart at point B is lower than point A.

Finally, we need to look at the Standard and Poor Industrials Index by itself. Is this also oversold and due for a bounce – as are the yield charts?

The short answer – based on the following daily chart (courtesy ) is “yes”. Note the non confirmation of the PMO oscillator and the price


Whilst the “investor fear” that has been manifesting over the past few weeks seems likely to recede temporarily in both the Bond Markets (yields may bounce) and the Stock Markets; and whilst the downward trend in both yields and equities is presaging a possible emergence of deflation – something sinister may be happening behind the scenes:  The gold market may be about to become dysfunctional.

This potential dysfunctionality is being evidenced by Backwardation in the gold price and the market appears to be sensing this possible dysfunctionality by shifting its emphasis to focus more intently on gold shares.  If this happens, it will be the first time since 2005 that gold shares will have outperformed the gold price. In an environment where many other technical indicators are pointing to potential deflation – as validated fundamentally by a slowing in the velocity of money – the potential relative strength of gold shares to gold is a very significant development. Professor Fekete may well be correct in his assessment that “ Central banks have stopped feeding the market with gold sales and leases.”

Overall Conclusion

My personal view (not a recommendation) is that it will make sense to buy shares in well capitalized gold mines which do not have forward delivery commitments .

By Brian Bloom

Beyond Neanderthal is a novel with a light hearted and entertaining fictional storyline; and with carefully researched, fact based themes. In Chapter 1 (written over a year ago) the current financial turmoil is anticipated. The rest of the 430 page novel focuses on the probable causes of this turmoil and what we might do to dig ourselves out of the quagmire we now find ourselves in. The core issue is “energy”, and the story leads the reader step-by-step on one possible path which might point a way forward.  Gold plays a pivotal role in our future – not as a currency, but as a commodity with unique physical characteristics that can be harnessed to humanity's benefit. Until the current market collapse, there would have been many who questioned the validity of the arguments in Beyond Neanderthal. Now the evidence is too stark to ignore.  This is a book that needs to be read by large numbers of people to make a difference. It can be ordered over the internet via

Copyright © 2008 Brian Bloom - All Rights Reserved

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

Brian Bloom Archive

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


John G
10 Dec 09, 17:45
gold investment

Analyst Report coming on VHGI Gold (OTCBB VHGI)

Post Comment

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

6 Critical Money Making Rules