by
Clive Maund
CliveMaund.com

Recently
by Clive Maund: Gold
Market Update 12/18/11

We have in
recent weeks been rather confused by the contradiction between the
strongly bearish price patterns that are developing in gold and
silver, which are indicative of a major top that portends a brutal
deflationary downwave, and the seemingly bullish COTs and sentiment
for the sector. Now we believe that we have come to a realization
with regards to what is going on with the COTs, which will be set
out lower down the page – first we will look at the price pattern
development.

Diehard bulls
are now raving about the “great buying opportunity” that they see
existing in gold right now, after its recent losses. This is reasonable
and understandable as gold is now about $300 below its highs of
last August – September, is oversold and in the vicinity of
a still rising 200-day moving average, and COTs and sentiment are
looking bullish. However, despite all this the price pattern that
is forming in gold, and in silver, looks bearish in the extreme.
As we can see on the 2-year chart for gold, a large bearish Descending
Triangle has developed since it put in its highs, above a clear
line of support at $1520–$1530. Unless gold can abort the pattern
by succeeding in breaking out above its descending upper boundary
shown as the red trendline on the chart, then it is destined to
break down, which will effectively mark the end of the bullmarket
and this implies the onset, or rather the rather the rapid deepening,
of the deflationary downwave that will then engulf many countries
that have so far escaped its worst effects such as debt-wracked
Britain and the US. If you want to know how bad it will get, you
have simply to study what has already occurred in Greece and Spain
– and it could get a lot worse than that with food shortages,
riots, and cities going up in flames.

Let’s stop here to consider the deflation-inflation argument briefly
once again. The world needs – and sooner or later is going
to get – a full fledged deflationary downwave, whose evolutionary
purpose is to eliminate the massive debt and derivative mountains
that are dragging the world economy into the mire. Of necessity
this must involve the elimination of the parasitic entities that
engineered the mess we are now in – the zombie banks and “too
big to fail” corporations that have shoved their snouts deep into
the trough of public funds via bailouts and other favors, such as
extremely low interest rates. What has been going on since the crisis
burst onto center stage in 2008 is that entrenched and powerful
vested interests have been seeking to stave off the necessary deflationary
purging by means of money pumping, playing around with the yield
curve, and getting goverments and central banks to keep interest
rates artificially low (for them) in order for them to continue
their lives of power and privelege and to give them time to offload
their bad debts onto to the taxpayer. However, time appears to be
running out for them. Their latest ploy is back door funding from
the Fed to the ECB in a desperate attempt to stop Europe collapsing
– but the situation is now so bad in Europe that it is doubtful
whether they will succeed. What looks set to happen is that bond
holders will call their bluff with an avalanche of selling that
drives interest rates through the roof – and this will eventually
happen in the US – so that the whole bloated edifice comes
crashing down in a hurry. This is what the ominous patterns in gold
and silver portend. The obstruction of the necessary deflation and
meddling by the powerful vested interests since 2008 has resulted
in the deflationary forces continuing to gather strength with the
result that the situation has become explosively dangerous.

Near-term
there is scope for a tradable rally in gold up to the red return
line of its Decending Triangle, as we can see on its 6-month chart,
and we bought the sector as it came off its lows about a week ago
in anticipation of this, as it was a very low risk setup, because
close stops could be placed just beneath the critical support level
at the bottom of the Triangle. The chances of such a rally occurring
are improved by the fact that a small Head-and-Shoulders bottom
appears to be forming, as shown on the chart, and we will be looking
to take modest profits on gold approaching the red downtrend line,
should it get that far. Longer-term, however, a breakdown from the
Triangle looks likely that would be expected to lead to a severe
decline.

The dollar
charts are certainly supportive of the notion that a deflationary
downwave is set to hit soon, for as we can see on our 4-year chart
for the dollar index, it has recently broken out of a large Head-and-Shoulders
bottom and looks set to advance strongly soon towards an objective
approaching resistance in the 87.50 – 89 area at the 2009 and
2010 highs, the first of which resulted from the panic into the
dollar as a result of the 2008 financial crisis.

With regards
to the realization concerning the seemingly bullish COTs for gold
and especially silver, the following observations were made after
Christmas on the site…

Up until now
we have more or less automatically assumed that the Large Specs
shown on the gold and silver COT charts were wrong and that if they
were reducing their long positions to a relatively low level, it
was bullish. This was a justifiable assumption that has worked for
about 10 years in the Precious Metals markets, as whenever Large
Spec long positions rose to a high level the PMs corrected, and
when they dropped back to a relatively low level the PMs reversed
to the upside to start a new uptrend, which is why we have taken
to lampooning them mercilessly, calling them fools and suckers etc
– but have the Large Specs really been wrong all these years?
– after all they have been long throughout the gold and silver
bullmarket. So it has to be said that overall they have not been
wrong, but what they have been doing, within their overall correct
long positioning, is becoming over-enthusiastic at intermediate
market peaks and too negative or conservative at intermediate market
bottoms. Despite being short throughout the gold and silver bull
market, the Commercials have made money by milking the emotional
extremes of behaviour of the Large (and Small) Specs at intermediate
tops and bottoms.

In recent weeks,
however, we have seen a sea change in the COT structure for gold
and silver, with Large Spec long positions dropping back to a very
low level in gold, and to an astoundingly low level in silver. Virtually
everyone, ourselves included up to now, has taken this drop in Large
Specs long positions to be strongly bullish, but looking at the
COT charts we can see that this is not a normal drop, especially
in silver. Bearing in mind that the Large Specs have been long throughout
the bullmarket in Precious Metals, this massive unprecedented drawdown
in their long positions, while at first glance looking strongly
bullish, may well instead be due to their deciding that either the
bullmarket in gold and silver is over, or at the very least that
a brutal deflationary selloff is looming, as in 2008 and possibly
worse, and this certainly fits with the bearish look of the price
charts for gold and silver and Precious Metals at this time, all
of which have suffered serious technical breakdowns in recent weeks,
and this is said with the knowledge that there is some chance that
the breakdowns may be the result of a planned campaign of “chart
painting” by Big Money.

So far this
realization that the Large Specs may be “draining” ahead of a major
bearmarket episide in gold and silver is just a theory, but it certainly
fits with the ominous price patterns in gold, silver and the PM
stock indices, and also with the horrendous outlook for 2012, which
promises to be the year when deflationary forces, held at bay for
so long, and magnified by further increases in debt and derivatives,
wreak havoc upon world markets and economies. This is the necessary
nasty medicine that the world needs to rid itself of the debt and
derivatives overhang and of the bloated parasitic entities such
as the zombie banks and elite corporations that are dragging everyone
and everything under.

There is another
aspect affecting the gold and silver price that we need to take
into consideration before closing, and that is the increasing chances
of military action against Iran. The “Axis Powers”, namely Great
Britain, Israel and the US, have long sought hegemony over the Mid-East,
for geopolitical reasons and to control the oil resources there,
and have made great strides towards their long-term goals for the
region in recent years. Here we should stop to point out that the
term “axis” as used here is not condemnatory as used by George W
Bush in his reference to an “Axis of evil”, but merely refers to
the congruent military and political alignments of the elites of
these countries and their common goals. Countries in the Mid-East
such as Saudi Arabia and the UAE are already “on board” as subservient
client states of the Axis. Countries such as Afghanistan and Iraq,
which were opposed to the Axis, have been invaded, neutered, and
have had puppet governments installed. Remaining countries opposed
to the Axis are being subverted and their governments toppled, examples
being Libya, where the job has been completed and Syria where work
remains to be done. That leaves one large ripe fruit waiting to
fall into the Axis basket, and that is Iran, and this fruit needs
to be prodded with a stick to get it to fall. The Axis considers
that it has nothing to lose, and possibly plenty to gain by provoking
conflict with Iran and is tightening the screw steadily by means
of more stringent sanctions etc etc and time is of the essence as
the Axis economies are verging on collapse due to excessive debt
and so may not be able to maintain their massive military machine
for much longer. If they can succeed in provoking Iran into doing
something rash, like blocking the Straits of Hormuz, then they will
have the perfect excuse to bomb Iran into submission, and will start
by taking out all its military installations and nuclear facilities.
The creation of an external enemy will immediately boost the flagging
popularity of politicians at home, such as Barack Obama, who can
then portray himself as the kind of “hard man” that American voters
appreciate – and this is an election year. Furthermore, a lot
of ordnance will be used up blasting Iran, which will be good news
for the defence industry who will then have big new orders to replenish
inventory. Once Iran and Syria fall, the Axis will effectively be
in control of the entire Mid-East.

Incidentally,
one of the jobs of Britain, as a primary member of the Axis and
a grudging member of the European community, is to limit the power
of Europe, which is why Britain regularly “puts a spanner in the
works” by vetoing treaties etc as it did recently and prominently,
although a factor in this may also be the “island mentality” of
Britain. Senior readers may remember the hilarious headline in a
British newspaper many years ago which read “Fog in the channel,
Europe cut off”, which sums up the attitude of Britain towards the
rest of Europe. The attitude of the Axis elites towards China and
Asians generally is also interesting. It became clear just weeks
ago when they all but referred to China as an enemy and announced
their intention to chummy up to Australia to create a military alliance
to counter Chinese influence in the Pacific theatre. It would appear
that China and Asians generally are not “members of the club” and
beneath the pleasantries of diplomacy are regarded as aliens, in
much the same way as you might regard the Klingons
in Star Trek.

Needless to
say, an attack on Iran could be expected to produce a sudden dramatic
spike in the price of oil, and also gold and silver, although for
obvious reasons the timing of such an attack is indeterminate –
it could happen in 2 months or in 10. Such an attack will be made
more likely of course by a deflationary downwave hitting, as in
these conditions politicians will be looking for a distraction for
the masses that gets them to “rally round the flag”. So while the
charts for gold and silver portend a severe decline, we should be
mindful of the potential for a sudden spike at any time should conflict
with Iran escalate.

In the event
that we do not tip into the deflationary abyss soon as expected,
probably the best commodity to invest in at this time is oil. This
is because there is a supply restriction working through now that
resulted from the drop in production due to the very low prices
following the 2008 financial crisis, as made clear recently by renowned
oil expert Dr Kent Moors. This is keeping the oil price propped
up and could result in substantial gains provided the deflationary
downwave doesn’t hit first – and any such price gains would
be magnified in the event of military action concerning Iran.

So we will
be examining oil and oil related investments soon on the site.

Reprinted
with permission from CliveMaund.com.

January
11, 2012

Copyright
© 2012 Clive
Maund