Gold Rises While The Overall 
Stock Market Is Strangely Calm

by Richard Gorton, The Resourceful Bear Blog | June 20, 2008

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In early morning trading gold, as traded by the EFT, GLD, rose while the overall US markets, VTI, and emerging markets, EEB, were strangely calm. Part of the story here is no volume.

We are on the precipice of a major stock and bond market downturn; which should make any bear happy; but, what lies ahead is more than a downturn, a total destruction of fiat wealth is coming, and the rate of fall is going to be faster than in the 1929-1932 Depression.

In yesterday morning's posting, I related that the yen carry trade investors fled the BRICs, EEB, and semiconductors, XSD, as the Bank Of Japan now cites increasing risks from global inflation.

I appreciate ActionForex posting the CEP News/Kevin Franco report that the Bank of Japan's monetary policy board is concerned about the rising risks to global inflation, according to minutes from the Bank of Japan's, BOJ, monetary policy meeting on May 19 and 20.

Frankly I am surprised that those in the carry trade waited for the report, as there have been news reports galore of inflation, and they could have assumed that the BOJ would have to say something.

Well, for sure, the bear market has now restarted disinvestment from stocks and bonds worldwide.

It was on May 19, 2008 that the TAF, TSLF, and PDCF rally ended; and on June 10, 2008, that for all practical purposes the yen carry trade rally ended.

The spigots of wealth have been turned off; the two great dynamos of wealth creation will now work in reverse, due to risk aversion of the level two assets and level three assets at the banks, and the risk aversion of inflation, to totally dis-inflate stock and bond wealth.

Yes, banks, KBE, and investment bankers, KCE, also fell; and banks, KBE, are falling again today; they are leading the overall US market down.

The banks troubles have a lot to do with the failure of the guarantors such as Ambac, ABK, and MBIA, MBI.

Capitol One Finance, COF, fell hard, and again today it is falling again. This alarms me; as I shared in previous articles, I am concerned that the commercial lenders are bone dry and capital exhausted, and won't be able to meet loan demand as a massive amount of debt is coming due this year: then what may happen is a systemic financial failure and a number of banks, lenders and corporations fold and go into bankruptcy.

The EUR/JPY, which is the yen carry trade barometer, FXE:FXY, showed a minute downturn at 1.68, and that down turn is still holding, reflecting both the disinvestment from stocks and the shrinking of investment liquidity.

Charts of numerous recently yen carry trade invigorated stocks, such as agricultural irrigation equipment manufacturer, Valmont Industries, VMI, and natural gas producers, Cabot Oil and Gas, COG, show that Bank of Japan financed investors who obtained investment funds at 0.5% interest, are taking flight.

Navistar, NAVZ, lacks any fundamentals to be trading at 75.00; its boost up from 50 is a perfect example of TAF liquidity and 0.5% Bank of Japan liquidity inflating stocks higher in the recent JP Morgan buyout of Bear Stearns rally: stock flew higher in an ascending wedge and finished in a parabolic upburst of buying frenzy, only to fall to yen carry traders leaving the marketplace on June 9th, and 10th, 2008. Anything transportation related flew higher, despite West Texas Crude, $WTIC, blasting higher intraday to $140.

The chart of the CRB commodities ETF, RJI, shows the lollipop hanging man candlestick and suggests that a fall lower in value is at hand. The chart of oil, USO, relates an imminent fall lower as well.

Natural gas, GAZ, shows bearish with a dragonfly candlestick.

It looks to me that all could fall lower, that is not only stocks and bonds; but commodities as well.

I'm definitely in the minority as most believe the dollar will strengthen: I believe that the US Dollar, $USD, is going to fall lower and lead a death spiral lower in all currency values; confirmation of such comes from the fact that the rise in USD/JPY has turned down from its recent high of 108.34.

Diebold, DBD, the often independent-news covered voting machine manufacturer, whose machines came recommended by Ohio Secretary of State, Kenneth Blackwell, finally manifested as a short selling opportunity with a bearish engulfing candlestick; and is falling more today. When I look at Diebold's, DBD, weekly chart I have to ask how and why did the stock get such a bump up? Don't they have an SEC to investigate things like that?

The US Healthcare, IHF, providers gapped lower; it does this; I mean it trades in fitful breaks lower. The impetus here being the likelihood of a Democratic Congress, which certainly does not help profit driven medical care providers.

Given the bearish report from the Bank of Japan, is there any alternative but to either short selling or investing in gold?

I am a gold bug in the sense of physical gold, and not gold stocks. Today, the gold mining stocks, GDX, are up more than gold, but the principle definitely is that in a debt deflationary environment, and a rising inflationary environment that there is going to be disinvestment over the long term in the gold mining stocks. The chart of the HUI indexed precious metal mining stocks relative to gold, GDX:GLD, clearly shows that the gold stocks, such as Barrick Gold, ABX, have disconnected from the price of gold and no longer have the potential to leverage the price of gold. That chart clearly shows sharp disinvestment from gold mining stocks, as yen carry trade investors sold on June 10. Lacking on going support from yen carry trade investors, gold stocks are doomed to failure.

I've cautioned continually against investing in the mining exploration company Silver Standard Resources Inc, SSRI, and I still do so, even though there are many stock holder pundits who post on wealth management sites, encouraging mostly out of self interest, for one to buy this stock.

There was a time to buy this "hopeful"; and that time has passed. Some were wise to short sell SSRI back in November, the awesome spinning top doji, in it's chart gave clear and rightful encouragement to sell.

The chart of SSRI relative to silver, SSRI:SLV shows that the ability of this company to leverage or even gain advantage over silver, is done and past: I strongly encourage all those who invested in the stock to trade out for gold, physical gold that is. Today, SSRI, is showing bearish engulfing, suggesting a fall lower.

The coal producers, KOL, are manifesting a spinning top doji: its all over here; lacking yen carry trade buyers, these are going to fall. The bearish harami in the energy producers, XLE, relates much the same.

The chart of DIG:DUG times market turns lower: its fall today, indicates one could buy the Proshares 200% inverse of the oil stocks, DUG.

I've searched hard to find the seven best short selling opportunities in domestic and foreign investments: the Proshares 200% inverse bear market ETFs: one buys these and goes long with these.

domestic stocks

SKK, Russell 2000 Growth,
SRS, Real Estate,
SSG, Semiconductor,
TLL, Telecommunications,

foreign stocks and debt

EEV, Emerging markets,
FXP, China,
TBT, Government bonds

Having presented the above voluminous information on short selling, I do not recommend it, as it exposes one to the risk of an ever decreasing US Dollar? And I, the Resourceful Bear say, "inflation, it's a stock and bond killer, and a gold thriller"!

The question must be asked: "Why did the stock market take, gold, GLD, up 1.2%; and the banks, KBE, down 3.0%?

Perhaps the answer goes beyond the Bank of Japan's warning on inflation to a 'derivatives cascade event' mentioned by Mike Mish Sheldon where he relates: "In something we all knew a year ago if not far longer, Bloomberg says Bill Ackman Was Right on MBIA And AMBAC: MBIA, Ambac on 'Ratings Cliff'. Ambac, ABK, set aside a mere $2 billion for $47 Billion of guarantees on CDOs backed by subprime mortgages. MBIA, MBI, set aside a mere $2 billion for $51 Billion of guarantees. Notice how the typical culprits Citigroup, C, Merrill Lynch, MER, and UBS AG, UBS, are poised to take the hit. All it takes is reality to set in and for a termination clause to kick in if the companies are insolvent. Is there any doubt that they are? So what's holding up the New York State Insurance Department from making that determination? Here's the answer: $400 billion of derivative contracts are on the line. The odds of a derivatives cascade event over this is not insignificant. Just one more thing: Anyone remember Greenspan's comment on derivatives? I discussed the answer in The Fed And The Henhouse. Greenspan May 5th 2005: "Perhaps the clearest evidence of the perceived benefits that derivatives have provided is their continued spectacular growth.""

The chart of the overall stock market relative to the banks, VTI:KBE, shows the dislocated nature of the overall market relative to the banks, and indeed the potential for a credit default swap, or mortgage backed securities default event, taking stocks and debt of all types fractally, that is gapping lower.

Or perhaps today, gold is up because of alarm that the Treasury Secretary Henry Paulson is calling for giving the Federal Reserve more powers.

Well, clearly, for what ever reason or reasons, an investment demand for gold is underway as shown by any metric one uses, gold relative to the Euro, GLD:FXE, gold relative to the Yen, GLD:FXY, gold relative to commodities, GLD:RJI, gold relative to oil GLD:USO, are up.

Gold is rising beyond a commodity and is establishing itself as an international currency.

Gold relative to government debt: GLD:TLT is up; this tells me that the gold is rising as an antithesis to the glut of US Government debt

Gold relative to stocks, GLD:VTI, and GLD:VEU are up on high volume and clearly showing an Elliott Wave 3 Breakout: gold has left the launch pad, well at least in relation to stocks.

The weekly chart of gold relative to world stocks, GLD:VEU, clearly indicates the investment demand for gold has resumed, and that even if gold falls, in nominal terms, it preserves wealth compared to being invested in stocks.

I strongly recommend that one dollar cost average an investment in gold via a trust account, not a brokerage account in the gold ETF, GLD, and via purchasing at BullionVault.com and GoldIsMoney.com.

Summary
The chart of the gold ETF, GLD, relative to the Euro, FXE, GLD:FXE relates that an investment demand for gold is underway.

Copyright © 2008 Richard Gorton, The Resourceful Bear Blog
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Short Bio My investment statement is simple: in a bull market be a bull; in a bear market be a bear. In a bull market, one buys on dips; in a bear market, one sells into strength. Research indicates that the stock market has transitioned from bull to bear; and that one's wealth is now best garnered and protected by investing in gold.

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Richard Gorton 360-756-5431 | Bellingham, WA USA | Email | Website

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