Favorable Gold Disconect

Four charts speak volumes, with only a few words to serve as captions. Ever since the lousy August Jobs Report came out (doctored to look better than the real situation), the gold picture has experienced a sea change. Gold is breaking out, not yet to new highs, but that is next. The gold price is not moving reasons offered in explanations. Anchors and interviewed guests fall short of adequate assessment. At the same time, denials persist on the huge damage to be doled out by the USDollar decline, as another round of systemic cost inflation will ensue. The talking heads have noticed the breakout above 700, while some have cited gold's favorable technical chart. It actually indicates an 850 target in the next year. They attempt to identify gold as an commodity play in the same vein as crude oil, copper, wheat, and corn, which have all risen in concert. Gold is the quintessential financial commodity, real money! They have mentioned that gold is approaching its beneficial season, as the annual holiday season invites jewelry shopping in the Western world. Nowhere is the monetary reason cited in connection with gold breakout above 700.

Stories, however, do appear that the USEconomy should not tumble terribly, since the central banks have reacted responsibly to the banking and bond problems plaguing the system. The networks and press report a 20% global money supply growth rate as the proper remedy, but fail to recognize that is precisely why gold is rising, along with banking system distrust and bond fraud. The two-week US$ growth rate annualized now is pushing toward 50%, although the last few weeks have been extraordinary. Heck these past couple years are extraordinary. Gold reacts to monetary debasement. Since when is 20% money growth accepted broadly as normal policy? We are gradually seeing Weimar times in banking, with colossal creation of phony money.

The banking leaders have tried the Fed injections on temporary loans with offered collateral. They have reduced the Discount rate. They have eased payment restrictions on Discount Window usage by banks. These measures are meager. The Administration has announced a flimsy plan to stem foreclosures with the help of the FHA, a true drop in the bucket. By this time next year, after the USEconomy hits one brick wall after another in surprising fashion, look for numerous planks to be in place on the official rescue plans. Why? Because none of them will succeed, and political pressure will force them to try something in addition. The banking system is in gradual seizure from distrust and deep suspicion. The asset-backed bond market suffers from toxic poisoning, grotesque mispricing, ratings collusion, and revulsion by duped foreigners. Now commerce is at risk of standstill from the commercial paper lockup, which is crucial to ship supplies, to supply inventory, to stock shelves, to pay suppliers, to meet payrolls, and to keep businesses running. Expect healthy corporations to pull back and hunker down, reducing things for sale, reducing people on the job. The financial foundation is teetering, laced by bubbles structures atop the corrupted capstone.

GOLD BREAKS OUT, HEADING MUCH HIGHER

Gold just blew past the 700 psychological mark in a breeze. The move from 655 in mid-August to 720 in early September makes for a hefty 10% jump. Some clowns still believe the gold price will retest 600. The recent gold move has not constituted a true breakout, since the 730 resistance mark stands as the next target. Confirmation comes from the imminent breakout in the crude oil price, as both gold and oil are in direct opposition to the USDollar. The oil price sports a 78 handle, threatening 80. Now that themonetary medicine is being prepared for the critically sick US financial sector, tied at the hip to the vulnerable USEconomy, which in turn is weighed down by the housing bear market underway, gold is poised to rise enormously for the next several months, if not quarters. An assault is coming toward the $1000 price. Even professional gold futures options traders are onboard to this, with huge October and December options in place to profit from this gold rush toward 850 on the next upleg. The September Hat Trick Letter covers this.

GOLD MINING STOCKS BEGIN TO WAKE UP

The gold & silver mining stocks had been in a slumber, but seem to have awakened. It might have taken an ugly ugly ugly day in mid-August, when a brutal selloff occurred, accentuated by huge volume, for the mining stocks to perk up. That was a climax washout. Weak hands are gone. Nothing like a bargain offering to provide a cattle prod with electric shock in the hind end to incite some animal juices. Until the HUI hits 380 and 400, the party hats will remain in the closet. One can be sure that the signals are all there, as the favorable autumn season comes. The HUI responds ultimately to the gold price, and gold mining stocks will eventually follow the gold price, and head much higher with growing volume. Gold can rise when monetary medicine is being prepared, but gold & silver mining stocks will rise enormously when that monetary medicine is finally administered. In a big way! The HUI index is heading toward 440 in this winter cycle, in a massive momentum swing. The September Hat Trick Letter covers this.

BUT THE S&P STRUGGLES

The S&P500 stock index is rolling over, heading down, slow to recognize the USEconomic recession. Sure, the SPX increasingly reflects the global economy, as multi-national firms export to Asia and Europe, enjoying nice translation of foreign operation profits. Despite that, the SPX earnings are still 70% derived from the United States business. The foundation for the USEconomy has been the housing sector and mortgage finance, one in crisis mode, the other in debacle mode. As Art Cashin says, "Goldilocks is in the Intensive Care center." Home equity withdrawals are a thing of the past, replaced by credit cards. The brick walls will be very evident, if not crystal clear, in coming months, most related to inhibited credit flow. Credit dependence has been discussed ad nauseum for years, but when credit is interrupted, few analysts properly forecast that the USEconomy will falter considerably in consequence.

The SPX shows a breakdown and new downtrend line for resistance. The SPX struggles to remain above the 200-day moving average, but finds strong resistance at the 50-day moving average. Once the 50dMA crosses below the 200dMA, one can turn the lights out on the mainstream stocks, and redirect the spotlight on the precious metals as they zoom. The SPX will follow the home builders, the mortgage lenders, Wall Street broker dealers, the big bankers, the car industry, and the consumers. That list is the core to the USEconomy. We should be thankful for the drug and defense industries, perhaps. When the first major home builder goes bankrupt, watch the publicity! When the next few major lending institutions go bankrupt, watch the publicity! Exporters are doing well, but that only means the left leg is walking well, while the right leg receives no oxygen and is cramping badly. A recession is coming by the winter months. The September Hat Trick Letter covers this.

THE BIG DISCONNECT, A GREAT SIGN !!!

Ever since Friday August 7th, the financial world changed, yet again. On several days the S&P500 struggled. In true opposite fashion, the gold sector thrived. While the SPX fails at key moving averages, the HUI launches off them upward. The negative correlation has finally returned, whereby the mainstream stocks decline but the mining stocks rise. The first beneficiaries are the larger and medium sized mining stocks. The next beneficiaries are the smallcap and tiny junior mining stocks. A split might come for a period of time, where small mining metal producers fare better than explorers who must fulfill ongoing capital needs. The following chart shows the ratio of the HUI mining stock index to the SPX index. If it rises, that means the miners are faring comparatively better. The September Hat Trick Letter covers this.

QUICK CONCLUSION

Clowns are running the system. Patients are running the asylum. Treasury Sec. Paulson while on the job has resorted to taking stupid pills. He today actually told the beleaguered home builders that "All this is happening against a backdrop of a strong economy." Wow! Could three years of 1% short-term official interest rates be part of the problem? How about the complete absence of regulatory oversight in the banking system, when building bubbles was their top priority? The USFed has embarked on 14 tightening cycles, with 12 or 13 resulting in recessions. The problems are mostly intractable. Many adjustable mortgages are tied to the London LIBOR rate, and are not influenced directly by official USFed rate cuts. The September Hat Trick Letter covers this.

Modern day financial engineering has built a lunatic contraption, not subject to adjustment or repair. It spews toxins by conmen and masters of fraud with the collusion of compromised USGovt and US financial sector gatekeepers. We export toxic financial securities to China, while they export toxic finished products to the Untied States. Trade sanctions and retributions are next. Hidden USTBond ambush sales took place in June, executed by China. Warfare is soon to take on methods, tactics, and measures never seen before. My sympathies to the 911 victim families. Two friends of mine lost a neighbor and a work colleague in the Boston area.

We are in historically unprecedented times. Economic structural dislocation has never been so severe. Globalization has led to incredible unsustainable strains and imbalances. Trade friction grinds dangerously. Central banks find themselves justified in massive monetary inflation, with active printing presses and efficient computer systems. Financial custodians are actively engaged in key interference with any and every financial price structure, in the interest of national security. Credit derivatives are growing parabolically and might be the primary impetus behind the falling USDollar. The world reserve currency has plumbed new multi-decade lows, sure to test the mettle of the world banking system. Menacing threats to banking system is the biggest of all motives to buy gold. My eyes are on the global backlash against US financial hegemony, laced with fraud, enforced at the point of a gun. Gold has begun its next long-awaited phase, in a march toward $1000, which will capture the world's attention, even the compromised, even the charlatans. The mania stage for gold is on the other side of the opened door!!!

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Jim Willie CB is a statistical analyst in marketing research and retail forecasting. He holds a PhD in Statistics. His career has stretched over 24 years. He aspires to thrive in the financial editor world, unencumbered by the limitations of economic credentials. Visit his free website to find articles from topflight authors at www.GoldenJackass.com. For personal questions about subscriptions, contact him at [email protected]