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Gold, Silver and the Great Unwind: No Conspiracies Here

by: Michael Shedlock August 17, 2008 | about stocks: GLD / SLV    
Michael Shedlock

Michael Shedlock

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What's happening with gold should be no real surprise. Although I have stated many times that gold is money and gold should do well in deflation, and we are in deflation, in the initial stages of deflation, leverage in everything is reduced by force.

There are thousands of hedge funds, pension plans, and individuals over-leveraged in a massive bet against the US dollar and US assets in general. Many themes of the past 7 years are now being unwound. And one would expect leverage to be forced out in deflation as credit simply dries up. I call this the great unwind.

The Great Unwind

  • Short US Dollar - Long Commodities
  • Short US Dollar - Long Foreign Equities
  • Short Financials - Long Gold
  • Short US Equities - Long Foreign Equities

Gold will reassert itself eventually, along with the short financials trade, but as the great unwind continues, the unwinding process for those in gold can be painful.

The reason gold will reassert itself is that Gold Is Money.

Bear in mind that gold disconnected from the US dollar in 2005 for the entire year, so it could do so again. Furthermore, there is really no way to tell just how long the unwinding can last. However, given that commodities were essentially a one way bet for the last seven years, the unwind can last a lot longer than commodity bulls might think.

Gold and Silver Seasonality

Another factor to consider is gold and silver seasonality. August through January is generally a very favorable timeframe for gold and silver, so that might (or might not) slow or even reverse the effects of the unwind.

One additional point is that silver, unlike gold, might easily act more like an industrial commodity and less like a currency than gold. Gold's primary role is that of money. Silver is a higher risk/higher reward offering when it comes to deflation.

Euro vs. Dollar Weekly

(Click on chart for sharper image)

The Euro has broken the weekly trendline, but barely. Unless it reasserts itself, a drop to the 200 day Exponential Moving Average (EMA) near 137 might reasonably be expected. There is also support at that level from the last major breakout.

Manipulation Theories Debunked

Many claim that that dollar was rising because of manipulation. Such claims are completely baseless.

Commodity Supercycle Intact

It is likely that the commodity supercycle is still intact. Oil is not headed back to $30 although a move back to $70 or even lower can easily be in the cards.

However, commodity bulls are likely severely underestimating both the great unwind and the Implications of the Slowing Global Economy. A cyclical downturn in commodities is clearly underway.

Gold Manipulation?

There are now screams of "gold manipulation" just as there were currency manipulation. I will not suggest there is no manipulation, but I will suggest that manipulation if and when it occurs does not work.

I had an interesting Email exchange with Nick at Sharelynx Gold just a few days ago over manipulation claims. We were discussing gold's rise to $1000 and Silver's rise to $20.

Nick commented, "Personally from my seat where I follow all my data I did see it as intervention - to help the cause - but then nothing new in that I think. I saw it as a little jab forwards for the US entering into the Beijing Games - a shot across the bows so to speak - much like we've seen Putin's shot across the bows.

I agree about the bit that if we've had manipulation from gold at 250 up to now, then bring on more of it. :-)

I do think it exists, and lots more than most imagine, but that in the long run it's all temporary support and Mr Market keeps on rolling along.

There is no reason to believe that dollar manipulation or gold manipulation is the driving force behind movements in gold, silver, and currencies. Never believe conspiracy theories or screams of manipulation when far simpler explanations such as the Great Unwind explains things quite nicely.

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This article has 16 comments:

  •  
    Aug 17 07:19 PM
    I guess people who "wind" (use leverage) must eventually "unwind". But those of us who hold the physical metal can wait until the cows come home. As for silver you can say that the price is $13, $12, $9 or $8. It doesn't really matter if the physical is no where to be found. As for oil and oil equities prices I don't know to many companies that are making money hand over fist like companies in the oil patch. Certainly not financials.
    Reply
  •  
    Aug 17 07:48 PM
    The "unwinding" will take a long time until people like traveler finally understand that the bubble has popped. Of course by that time all their money is gone. Gold sold for $800 once and it took 20 years to get to 250. Many rode it to the bottom. Well after 28 years they broke even. A great investment.
    Reply
  •  
    Aug 17 09:25 PM
    Any investor that doesn't have positions in gold and oil going forward into an era of peak oil related economic dislocation simply doesn't understand how the next 28 years will be drastically different than the last 28 years.
    Reply
  •  
    Aug 18 12:20 AM
    Agreed, Fitzman. A naval blockade of Iran will rocket oil, and gold will go with it. The USD is fundamentally so weak, no amount of "unwinding" will save it from a significant slide once this rally is over.
    Reply
  •  
    Aug 18 12:46 AM
    When physical delivery of something is virtually non-existent (1% of futures contracts), Mr. Market is calling from never-never land. It's not a question of conspiracy; the question is, "who the hell can call this price discovery with a straight face?".
    Reply
  •  
    Aug 18 10:03 AM
    Mish,

    This is the first article (by you) that I am scratching my head, wondering, because I am not sure what you want to REALLY wanted to say, but didn't!

    Run this by me again, please:)
    Reply
  •  
    Aug 18 11:06 AM
    Pul-lease! ENOUGH of the "Gold is Money" claptrap!

    What is money?

    Money is the medium we use to facilitate the exchange of things, like wages paid for effort/results, or to facilitate barter by providing a common denominator (or currency, if you will). That is the acid test for whether or not something is money.

    Can you buy groceries with gold? NO.
    Can you put gas in your car with gold? NO.
    Can you exchange gold for stocks, bonds, or other capital investments, without going through the medium of credit? NO.

    Gold is not fungible (mutually interchangeable). In this country we use CREDIT as money. That is how the Fed creates money. CREDIT (including the instantiation of it in the form known as "cash", or promissory notes) is accepted everywhere.

    Gold is simply a commodity, and one that has a minor fraction being added to the global supply and being consumed via industrial use, so it has a fairly nonvolatile global "open interest". That is what differentiates it from oil or corn. Diamonds could be treated on a par with gold, except that diamonds have a much greater usage in industry, and they are now synthetically created. So gold has some handy characteristics as a commodity.

    But it is NOT MONEY. I know that you know this, but there are plenty of simple-minded people who grab onto that as a mantra, and do stoopid things (like accumulating a commodity whose bubble has burst, sacrificing legitimate cash to do so).

    And for those who believe that a gold standard would prevent our elected officials from spending more than we give them, and not borrowing to spend ever-increasing amounts, ask yourself how likely this really is. Adopting a balanced budget amendment would work as well with a fiat currency as with a gold standard. And without fiscal discipline, administrations and Congresses would continue to borrow beyond the taxpayers' ability to repay, stealing from the future to fund their present wastrel ways -- this will happen regardless of whether we are on a gold standard or not.

    Gold is not magical, it is NOT MONEY!

    One could buy several other commodities to afford some protection against the past financial excesses coming home to roost. Gold is not the only commodity for this purpose. Platinum, or some of the scarcer metals are better bets than gold, because they are not only scarce, but they have more industrial uses, and the supply of those items is getting smaller over time.

    Compare the charts of platinum vs gold and oil to see the truth in this.

    But still we hear this relentless drumbeat of GOLD IS MONEY.
    Gold may well be a "store of value", but it simply ain't money, and is never gonna be.

    What a pile.
    Hope y'all can find a pony in it.
    Reply
  •  
    Aug 18 12:01 PM
    My apologies. I realized that I am wasting far too much time on crazy discussions on irrational memes regarding gold, and have accordingly stricken it from my list of Seeking Alpha email topics.

    Hopefully, in the future I won't be blathering on trying to push a perspective that gold bugs don't want to hear. Y'all can continue to await the golden rapture that will surely come when all the wicked fiat currencies are vanquished and the pure and proper true believers rejoice in everlasting salvation and prosperity. Say hi to Pizarro for me.
    Reply
  •  
    Aug 18 01:50 PM
    I got five bucks that says he'll be back.
    Reply
  •  
    Aug 18 03:27 PM
    "I got five bucks that says he'll be back."

    lol, yep. Some folks just dont study history, and are forced to repeat it.

    Reminds me alot of some French guy who convinced the King to use paper money.

    Didnt that guy get chased out of France, running for his life when the currency system failed?

    www.rapidtrends.com/bl.../
    Reply
  •  
    Aug 18 03:38 PM
    If you want to learn about fiat money get on a plane to Zimbabwe.
    Reply
  •  
    Aug 18 10:30 PM
    Gold may not be money , but it takes some 22 times as many dollars to buy an ounce of gold today verses some 70 years ago , about 35 dollars.
    Oil about 50 times .
    Did Gold become more valuable ? Don't think so . Dollar became more worthless.
    Reply
  •  
    Aug 19 10:24 AM
    MIchael, could you please address the following question for your next post?

    "Why is physical silver nearly impossible to obtain in the midst of a price collapse?"

    Thanks.
    Reply
  •  
    Aug 19 10:55 AM
    David Lentz:

    It is certainly a viable contention to claim that gold is not money.

    But one thing is for sure, it is closer to being "money" than the ink marked paper issued by the Federal Reserve.
    Reply
  •  
    Sep 05 03:17 AM
    I had to comment on this:

    "Pul-lease! ENOUGH of the "Gold is Money" claptrap!"

    The US dollar is the longest lasting paper fiat monetary system that's every existed. You know how long that's been running?

    Almost 40 years.

    You know how long gold was a monetary standard before that?

    5000.

    So, which do you think is the aberration? People often make the classical mistake that whatever time they currently live in is the "normal" time. We're in an exceptional time. And exceptional time that won't last.

    You know the saying that the majority is wrong when it comes to financial markets? What do the MAJORITY of people think about gold? Do they think it's money, or simply something tin foiled hat nutzos think will become money?

    And for the record, the dollar has been tied to oil, which is why it has any worth at all. This was done by the Carter Doctrine and the Reagan Corollary. The US gave OPEC the uncontested right to exist, as long as they traded only in US dollars. This system started to break down when President Cuckoo Bananas and his predecessor started making threats to an OPEC nation - Iraq. Hussein started converting his country's economic surplus to euros. Of course, since the war, this has all been reversed.

    Guess which other 2 OPEC countries have done this?

    One is Iran, and the other is Venezuela. Of course, I'm "crazy" to think the US is threatening them because of their monetary decision, naturally it's really about nuclear weapons and communism, but we don't seem to have any problem with North Korea having nuclear weapons, or with China being communist - in fact, we let China buy as many Treasury bills as they want.

    The biggest lies aren't hidden by conspiracy, they're hidden by incredulity. It's obvious what is going on, it's just so blatant, you can't believe it.
    Reply
  •  
    Sep 05 04:40 PM
    Sh ithead mish/nadler are the enablers of this fascist redistribution (theft) of gold from the little guy to the CB's.
    Don't spend the time trying to convince them. They know better than us whats going on but they have their agendas. Baybe one of the bankers promissed to f uck them in the As s for their cheep blabbering services.
    Buy your gold (physical only) and forget everything else. Their game will be over, gold will be trading in the thousands in a few years and you'll be holding the bullion which is and will be even more priceless in a few short years.
    Good luck to all
    Reply
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