Making market calls, or "predictions", is a common practice. Timing is always the hardest part. If your sole source of income is derived from the success of these calls or predictions, it is advantageous to attach a timing that is far enough out that it allows for new information to surface that can be used to mitigate any damage done to your reputation should that call be wrong.
Normal market calls usually state that for fundamental or technical reasons, a trend line is due to change directions. But in the short run, where market calls normally reside, fundamental forces often take a back seat to momentum. It has always been this way, which makes fundamental-based timing more difficult. But now more than ever, it seems that fundamentals have taken a seat all the way at the back of the bus.
Generally, the purpose of market predictions is short term profits. For this reason, the business of calling markets has shifted over the last year, far away from fundamentals. I am not saying that no one is making fundamental calls, only that many newsletter writers who make their living doing this are saying two very different things out of two sides of their mouths.
On one side, they are saying "go with the flow for a profit" and on the other, "fundamentally we are due for a big change". So the way they reconcile these two different predictions is by setting up a boundary between the short and long term, a boundary which they will keep pushing forward through time until, unexpectedly and catastrophically, the short and long terms collide. Then they will finally claim magical predictive powers, even if their followers have lost everything.
This business of calling markets is a lot like the modern version of investment banking; totally focused on short run profits while long run catastrophe looms large.
Soft Supply, Hard Demand
It is often repeated that our markets are driven by supply and demand. In fact, supply and demand is probably the most closely watched fundamental of the market callers. They look for various signals that demand is rising, or supply is falling. Perhaps they are thinking too hard in a very soft world. Or could it be the other way around?
When we think about supply and demand, it is helpful to think of an ancient barter world, modern paper trading tends to muck it up a bit. So think about a supply of chickens at a Medieval fair. Let's say there are 10 chickens cooped up in a booth, with several buyers bidding for the chickens with their various goods. The first bidder take two chickens for the price of two bushels of apples. He hands over his apples and walks away with the two chickens.
Now, the rest of the bidders are faced with the hard reality that there are only 8 chickens left where once there were 10. This is called "hard trading" and the bidders are able to form "hard opinions" about the real supply and demand in front of them.
Next let's imagine that the first bidder only had to put up 5 apples as margin and then wait until the end of the fair to decide what he wanted to do with his purchase. How would this affect the rest of the bidding? Now the other bidders must make value assessments based on "soft opinions" relying on conjecture like "that first bidder rarely takes delivery of his chickens, he's just in it for the quick apple." This is soft trading.
Soft trading tends to draw in a lot of bidders (traders) who are willing to put down a margin requirement in the hope of making a small profit at the end of the fair. The seller of the chickens may have 30 different buyers for his 10 chickens, each putting down 5 apples (or whatever their good is). At the end of the day, 5 buyers will go home with two chickens each, 10 buyers will receive their 5 apples back plus 3 more apples in profit, 15 buyers will lose their 5 apples, and the seller will end up with 10 bushels plus an extra 45 apples while the "price" of chickens actually falls! This is because the seller, who had only 10 chickens to sell, flooded the market with 60 "paper chickens" driving the price down and at the same time making himself an extra profit.
Why More Buying means Lower Prices! (in paper markets)
In the leveraged market of paper gold, the more buyers that show up, the lower the price will go. Here is how it works. Let us say that we want to play on the front lines of gold price discovery; the futures market. We believe fundamentally that the price of gold must rise, so we become buyers of future gold. But let's say that we only have $5,000 to play with. So we pay our $5,000 margin to gain control of a $100,000 contract for 100 ounces of gold. If gold goes up $50/ounce while we hold this contract for future delivery, we will make $50 x our 100 ounces, or $5,000. A $50 rise in gold only represents a 5% increase, but our profit was 100%! We doubled our $5,000 turning it into $10,000!
Here's the problem. We don't have enough money to pay $95,000 more for the physical gold. And the bullion banks KNOW this. They know that there is a 90% probability that we will not take delivery. So when we placed our bid for 100 ounces of gold, they simply issued a brand new paper contract, not backed by real gold! This is pure paper gold inflation. And the more contracts there are, the lower the value of each contract. The same way supplying more dollars makes the value of each dollar fall. It really is the same thing!
This is how a million new paper gold buyers, or ETF subscribers can actually make the price of gold FALL! All the fresh demand is met immediately with fresh supply, inflation in the paper gold market. This increases the supply that is visible to new bidders, lowering the value of each unit.
Only the buying of physical gold, taking it into your possession, puts upward pressure on the price. All other buying puts net downward pressure!
The last 20 year record of gold prices clearly shows a gradual shift from the total confidence in the paper contract market of the early 90's (contracts were "as good as gold"), to the massive inflation of the paper gold market in the late 90's (falling price), to the gradual shift from paper to physical of the last 8 years (rising price), starting from the top (the "giants") and trickling on down to you and me, J6P.
Gold and the Dollar
The history of the dollar's relationship with gold has been extremely consistent. It is a tale of equilibrium followed by extreme disequilibrium, followed by a reset, over and over again, several times now. The distortion of equilibrium is ALWAYS caused by the dollar suppressing the price of gold while freely inflating itself.
From 1913 until 1933, the price of gold remained fixed at $20 per ounce. As paper money increased during those 20 years, the pressure on the system, seen in the growing knowledge that gold was becoming more and more underpriced, needed to be released. So in a drastic reset, gold was forcibly confiscated, outlawed, and then up-valued by 70%. Wow!
Then once again, pressure grew as dollars continued to multiply like bacteria while the international settlement price of gold stayed fixed at a constant $34 per ounce. In the 1960's, central bank gold became segregated from the public as a parallel "free gold market" emerged. Central bank gold circulated at $34 per ounce while private gold changed hands for as much as $45 an ounce.
This development was a free market step forward in the evolution of gold, called at the time "the demonetization of gold". But some economists noted that the price did not take off as they had expected it to in the 1960's. This was because the "soft opinion" of the time (rightfully) conjectured that the CB gold would not remain segregated forever. And sure enough, in the 1970's this came to pass.
In the 70's, of course, the demon(et)ization of gold became official policy. But as in all things, just because the government says it is so, doesn't necessarily make it so. And as the dollar's exponential, bacterial growth continued, so did the appetite for gold as a physical money to hold and store wealth as a reserve, a monetary function officially removed from legal tender currency by "the demonetization of gold".
But through this process of the 1970's something new emerged, "the dollar standard". It took a little while to iron out the kinks and figure out how things were going to work, but by the early 80's the whole world was sailing into the uncharted waters of plentiful international liquidity, growth of wealth and industry through leverage and other financial wizardry, and headlong into the harsh realities of an exponential growth storm.
All the while, the gold market was quietly reorganizing in its new, "demon(et)ized" role. Mining interests cozied up to the new powerhouse forces running the world. Barrick Gold was formed. Forward sales and hedging developed. And the paper gold market was born.
Throughout the late 80's and early 90's this new dollar standard and paper gold market seemed to be working to everyone's advantage. Europe and the US worked together to keep the price of gold steady and low and to keep the dollar "as good as gold" for oil and other global interests. This low and steady price also allowed longer term contracts to be established, promising the continued flow of the cheap oil that was necessary for this "new growth" economy.
Paper gold had not yet inflated like it did later under the official strong dollar policy, so these long term forward gold contracts seemed sustainable and paper gold traded "as good as gold" for the time being.
But then in the mid-90's, the central banks started to realize the extent to which their gold was flowing out in support of the dollar. They tightened up and traded mainly amongst themselves to create the illusion of heavy gold traffic. This was done to encourage the forward sales (hedging) of the mining interests, to support liquidity in the paper gold markets which were starting to inflate through naked short selling, and to lure into the market new physical gold from weak hands through a falling price.
Around this same time Larry Summers arrived on the official scene with a copy of his 1988 paper, Gibson's Paradox and the Gold Standard, and "The Strong Dollar Policy" was born.
The birthday of the Euro was also fast approaching at this time, and the US knew that the Euro would benefit from a rising physical gold price. So perhaps the Strong Dollar Policy was, in part, a preemptive reaction to the birth of a new competing currency. In any case, it is around this time that the paper gold market EXPLODES with "fresh (paper) supply" and its initial purpose, "to guarantee the continued flow of cheap oil necessary for a growing economy", begins to erode.
It is also around this time that Europe and the US part ways as a "gold alliance" in support of the "petro-dollar". Europe adopts a new policy of "Freegold" by quarterly marking its physical gold reserves to market bullion prices while the US pretends its gold doesn't matter and leaves it booked at $42/oz. The US also convinces London to join it in the printing of more paper gold to support the dollar. And the BIS sides with Europe.
Certain oil producers who have been accumulating gold through forward mining contracts don't like this new extreme paper gold inflation. It threatens their method of compensation and they stand ready to raise the price of oil. Europe and the BIS see this development and stand aside, endorsing the flood of paper gold knowing that the rebound effect can only be good on the day the Euro is born.
And then, on January 30, 1997, the daily volume of paper gold sales on the London Bullion Market Association (LBMA) IS LEAKED through an article in The London Financial Times (FT). Posted by "The Red Baron":
The London Bullion Marketing Association (LBMA) can only be adequately described as "a riddle wrapped in a mystery inside an enigma."
It shyly emerged upon the news airwaves on January 30, 1997. Its appearance was almost as an after-thought, deceptively innocuous with few superlatives to distinguish it from the daily diarrhea of financial news spewing forth from the bowels of the world's money centers. Few readers took note of it... most gave it little import. To my knowledge it was an esoteric select few at the Kitco Gold Chat group, who really zeroed in on the draconian significance of the news.
Was the news a bureaucratic slip of utmost discreet information - indeed top secret data - or was it a well-timed and methodically planned leak to the press. Or perhaps it was the "whistle-blowing" of an irate employee, who was passed over for promotion? Who really knows? In any case we will provide all the details surrounding this monumental announcement... and allow the reader to draw his own conclusions.
The LBMA Announcement -
Literally at the crack of London dawn on January 30, 1997, the London Financial Times printed the following:
The London Financial Times
Gold global market revealed
THURSDAY JANUARY 30 1997
By Kenneth Gooding, Mining Correspondent
Deals involving about 30 million troy ounces, or 930 tonnes, of gold valued at more than $10 billion are cleared every working day in London, the international settlement centre for gold bullion.
This is the first authoritative indication of the size of the global gold market, and was revealed yesterday by the London Bullion Market Association.
The volume of gold cleared every day in London represented nearly twice the production from South African mines in a year, Mr. Alan Baker, chairman of the association, pointed out.
It was also equivalent to the amount of gold held in the reserves of European Union central banks...
For 8 months following this strange event, the chat room at Kitco (the ONLY gold chat room at the time) buzzed with intrigue about the meaning of this revelation. Then out of nowhere, someone started posting under the name ANOTHER, offering a plausible explanation for everything that had been happening in plain sight. But the real kicker was ANOTHER's call -->PREDICTION<-- of the END of the dollar as the global reserve currency! Back in October '97, this call was COMPLETELY UNPRECEDENTED!
It became apparent to those who followed ANOTHER that he was closely tied to the monetary faction that opposed the massive inflation of dollars and paper gold. It became clear that he was somehow associated with the ECB and/or the BIS. It also became clear that he had been writing through an intermediary, an American friend, in order to ensure his anonymity. This friend came to be known as "Friend of ANOTHER", or FOA for short.
Their "call" ended up being HUNDREDS of posts over more than FOUR years! And they did not just drop this bombshell and walk away. They carefully explained everything in great detail, taking the time to answer many of the questions that were literally HURLED at them.
Could this be "the call of the century"??
Can you name me ONE other analyst who had this conclusion, at this time, with this recommended course of action? Anyone?
Few would dispute this call today. Only the timing seems a little suspect. But let's explore this "timing" issue for a second. What is the ONLY important thing about timing on a call like this? It is being EARLY! That's right. When this happens, you are either early or you're late. There will be NO in-between. Granted, some others made this call in the late 70's. They were perhaps too early. But just to be sure, let us look at the results of ANOTHER's call so far.
If you had followed ANOTHER's advice to accumulate ONLY physical gold metal at the low prices of the day ($280-$320) you would not only have missed the pain of the "Dot Com" collapse, but also the real estate collapse and the recent stock market collapse. Not only that, but you would have seen your savings DOUBLE in Euro value and TRIPLE in dollar value. Not bad for a decade with so much pain!
Now, I'll admit that this is not exactly like getting in on Google's IPO, but wait a minute, not ALL of his calls, his -->PREDICTIONS<-- have come to pass yet! I know some of you have made a small fortune on last year's spike in oil. And others made a fortune in real estate over the past decade, as long as you CASHED OUT at the right time! But what ANOTHER's call means when it finally comes to pass is that all profits of the past decade could potentially be WIPED OUT over night if they are not positioned properly. It also means that some, the few people who understood what is actually coming, will be the beneficiaries of a ONCE-IN-A-LIFETIME transfer of wealth that is merely a SIDE-EFFECT of the natural adjustment process that all fiat currencies must go through when they resist nature.
Meanwhile we have some of the most famous market timers like Richard Russell now calling for a Bull Market in stocks based on Dow Theory. Russell is simply giving into the obvious manipulation to make a short term profit. Anyone who has followed this blog for a while knows that I think the markets are HOPELESSLY RIGGED right now and that anyone with any sense would not go near them. Here is another example I came across recently of someone who recognizes the paper game is totally rigged, yet still encourages playing ball:
Catherine Austin Fitts (transcribed)...
You know, I suspect that we're watching a market where the players who have inside information, because they are, you know, trading on behalf of the Plunge Protection Team, and they own the central bank, I mean you're looking at the firms who are members of the New York Fed, and own the lead central bank, and so, create the currency. So they have incredible inside information. And I suspect that they are using that information to make a lot of money in the markets both legally and probably illegally.
What we're advising people to do is essentially withdraw from a rigged game. And so don't invest in large corporations and large government securities. But rather, practice financial intimacy which is investing in who and what you know. So the reality is that this game is not to the advantage of the small investor, and the question is how can we switch out of it, and start investing in things where we can have confidence in either the ethical nature of the company and the products and services, or the ethical nature of the market in which we are participating? So generally, my recommendation is to stay away from large and mid-cap stocks and also to move out of the US markets. There are countries and areas of the world that are more ethical.
Why? Why not invest in the one asset that is a true monetary wealth reserve? An asset with a very limited downside and a virtually infinite upside! An asset that is a future claim on ANYTHING in the world, not just one specific local company. It is even a monetary wealth reserve FOR THE CENTRAL BANKS!!! This function [wealth reserve] of money has been STOLEN from us by the central bankers and their fiat currencies, in which ALL other investments are denominated! This function, the wealth reserve, was second only to the trade function of money for thousands of years. We lost this function of money when actual physical gold stopped being used as currency. But the idea of this function persisted, driven by the greed of the bankers to not only skim profits from trade, but to take the much larger skim that comes from savings!
This reset of value is going to be a one-time-event when it finally happens. After that, things will be in equilibrium again. And this event will have little empathy for your cricket-like jump-skillz as the shoe drops. Many skillful traders will be completely squashed.
The big debate right now seems to hinge on a slow collapse versus a fast collapse, and internal versus external. My gut tells me it is likely to be fast and external. What better time to take down Wall Street than while they are still long the dollar, short the Euro, and short gold? Wall Street is far too confident in its own manipulative power, and I imagine a strong movement sooner rather than later to take it down. The rest of the world has to be worried about an organized dollar devaluation from the inside, so why wait? The spineless parasites in Washington don't have the backbone to make a big move until they are SURE they can blame someone else. But whoever STARTS the panic, profits most!! "The early bird gets the worm", as they say.
I believe that the collapse of the dollar is directly linked to the paper gold market. Much is written about how gold will profit from the falling dollar. I think it is the other way around. It may just be a semantic difference, but I really think that gold is the key! And I feel privileged to have found the one explanation that makes so much sense. The call of the century, made less than 12 years ago, unfolding in front of our eyes today!