-- Posted 19 December, 2005 | |

"How much gold and silver is enough," inquired one of my readers the other day? "How much do we need to protect ourselves?" My reply was that five and ten percent of one's portfolio seem to be way too low if things are really as bad as the analysts make out. If they really believe that the dollar is going to crash big time, then why would any analyst advocate only 5%-10% of one's wealth in gold and silver? This is one of those mystifying irrationalities that circulates among the "experts" without any justification.

Let's face it; America is caught up in what Bill Bonner has appropriately termed an "Empire of Debt." Things are not going to improve. They are going to get worse, much worse before any meaningful reform of the system will be salable to the people. It's kind of like trying to get a mule's attention; you have to practically whack it up side the head with a two-by-four before you get a response. The people are like mules, and they are led by charlatans on Wall Street and in Washington. So we can expect the world's currencies to be debased quite severely over the next 20 years. Bernanke will have to inflate or die. 

Thus a 5%-10% portion of one's portfolio in precious metals seems like nothing but a pittance, terribly inadequate for the future that is staring us in the face. Analysts that recommend such a minimal percentage are not serving their readers very well in this writer's opinion. As to what percentage one should actually hold, this, of course, would vary according to the person's temperament. But it should certainly be far greater than the miniscule amounts conventionally recommended.

There is another irrationality that inexplicably circulates also. It warns about the dangers of holding shares because they are paper instruments rather than the real thing. This is quite mistaken. When the FRNs that mining stocks are denominated in go in the tank, the stocks don't follow them. They rise accordingly. Just as gold and silver coins rise accordingly when FRNs go down. Even though mining shares are paper documents, they are deeds to a certain portion of the real thing that is owned by that company. The only difference is that the gold is in the ground instead of in one's vault. But it's still gold, not paper that one's shares represent, and thus it is real wealth.

Therefore, shares shouldn't be thought of as paper any more than warehouse receipts for stored gold in a vault are to be thought of as paper. Shares are real wealth, and they give you great leverage. They are riskier, of course, than coins or bullion because mining companies are prone to possible bad judgment and bankruptcy, etc. But if one is willing to take the risk, then he has his money in REAL wealth just as much as the man who stores his gold in a vault.

As I see it, the big danger we have is to keep our wealth in FRNs in a bank. That's a sure loser because our wealth then has only one way to eventually go -- down.

The Price Path of Gold

The beginning of the great market tumult is upon us, I do believe. This last run in gold has stirred up the investors of the world like a rock star's appearance excites the schoolgirls. The yellow metal is suddenly big news around the globe (though you wouldn't know it if you read the Wall Street Journal and tap into the establishment lackeys at CNBC every day), but it does appear that the Cartel may finally be in trouble. With the recent sell-off, the question we need to ask is: Are caution lights blinking, or is the Cartel finally dead? Frankly I have no idea. I do know that the Fed's agents are cornered rats, and they will fight till the bitter end. So to start writing their obituary is probably a bit premature.

Below is a chart of weekly gold with the 50 week and 200 week moving averages. It is incredible how closely gold has adhered to the 50 week MA (blue line) over the past 5 years. It moves away for awhile, but invariably it comes back to that 50 week MA. Could this be the guideline that the Cartel follows in its dumping schemes, trying always to bring gold back to its 50 week MA? If the Fed and its mega-bank agents can keep gold always close to this average, then it will take until about 2015 before we get $1,000 gold. I would say that this does not bother the Fed. They can accept such a price escalation because it is slow and takes place over time. This type of price movement would not alarm the populace. 
     

What the Fed fears, of course, is that gold will explode and start moving away from the 50 week moving average and start climbing in a much steeper path so that we get $1,000 gold in a year or two. Then a correction, then a rise to $1,500 gold and beyond. This would destroy the dollar along with the bond and equity markets and start setting off derivative dominos all over the place. LTCM crises writ large and in multiples -- Bernanke's worst nightmare indeed. America would sink into a catastrophic meltdown. So it should be obvious that the Fed's agents are orchestrating a frantic and heavy dumping of gold every time bullion moves away to any extent from the 50 week moving average.

The brilliant Michael Bolser has an elaborate system to monitor all this, which he calls Interventional Analysis www.interventionalanalysis.com. He sees the Fed's agents (which are also called the PPT, the Cartel, or the COT) as operating a highly sophisticated computer program to try and guide gold upwards very slowly over the upcoming decades along what he terms a "main line" that they program in with mathematical algorithmic formulas. According to Bolser, their main line is a "complex moving average of the DIVG" (Dollar Index Value of Gold). As I see it, this main line is probably close to the 50 week MA shown above.

The essential point about Bolser's view of things is that we live in an era in which the Federal Government (along with the Federal Reserve and its mega-bank cohorts of Wall Street) are hell bent to control as many facets of the market as they can. They are doing this so as to ward off the chaotic meltdown that must come because of the Keynesian fiat money blizzard they have unleashed over the past 35 years since Nixon unhooked the dollar from gold in 1971.

This view, of course, coincides with Bill Murphy's view www.lemetropolecafe.com. Gold and silver are being severely manipulated with their prices suppressed through central bank dumping. GATA's message has been for the past seven years that this dumping must eventually end, or at least slow down considerably due to lack of supply and willingness of the world's central banks to sacrifice any more of their gold. When the end of the dumping (or its slowing down) comes, gold will begin to trade much more like a free-market commodity. At this time, gold will begin to escalate rapidly and take off for $1,000 per oz. and higher. The difference between Murphy and Bolser is merely in the timing. Murphy feels gold is ready to explode now; Bolser feels that the Fed's agents are not dead yet and that they are going to bring gold back down drastically.

Thus the BIG questions are: How long can the Fed and its Cartel agents keep dumping gold? How much gold do they have left? Is GATA correct in assuming that they are close to running out? This last spurt away from the 50 week moving average looks quite ominous for the Fed. And I have to believe it has scared them considerably. Now the question is, do they have the power to bust gold back down to the $450 range where the blue MA line is, or will the world's demand overwhelm them and explode gold upwards to $600 this next year on its way to $800-$1,000 the following year?

My guess is that with Bernanke coming on, with America's debt exploding past 300% of GDP, with the Iraqi war bleeding Washington of both finances and voter support, with our real estate market emulating the Nasdaq in 1999, with the rest of the world's nations trapped in currency devaluation in order to stay alive, the investor sentiment around the world (from both big money boys and average savers) has now shifted tremendously in favor of finding something real to store one's wealth in. This is the beginning of the end of the Cartel. For sure, they will continue to fight the trend and attempt to suppress the price of gold. But their efforts will become increasingly ineffective. The winds of bullish gold sentiment are rising throughout the world, and the truths that spawn such winds are about to overwhelm the past decades of lies and fraud from the world's central banks.

We can thank GATA and its general, Bill Murphy, for playing monetary Paul Revere these past seven years shouting to the world that the Fed manipulators are rigging the market. Lesser men would have caved in long ago in face of the resulting ostracization, but not this steel willed David. He has taken on Goliath in face of blistering ridicule from the establishment herd to steadfastly warn the world of what is coming and why.

But then this is the makeup of the man. The NFL also ridiculed him back in 1968 -- called him too scrawny and slow to play for them. Consequently he was totally ignored and went undrafted out of college after a sterling collegiate career. Bill saw his talents differently, however, and persisted relentlessly until the Boston Patriots finally allowed him a walk-on trial at their training camp. Needless to say, he not only made the team, but had an excellent rookie year. Talk was even that he should be groomed to replace the legendary but aging Gino Cappelletti as their main wide reciever. Unfortunately Bill blew out his knee the next season and his football days were over. But Wall Street beckoned, and he proceeded to carve out a prosperous career as a trader in the ensuing decades.

Eventually, though, came the stunning realization that the game was rigged by the mega-banks who were in bed with the Washington pols, which drove Murphy into igniting the GATA cause in the late 90s. The rest of the story most readers should know if they have been following the markets since 2000. GATA marches on in face of Wall Street scorn because it has truth on its side. Truth is an amazing equalizer. It allows Davids to eventually bring down Goliaths.

Where then is the price of gold going? Long run, certainly up in a big way. Short run, impossible to say. But even if the Cartel does have one last major suppression in them, I would think that gold will be hard pressed to fall below the $450 range (blue 50 week MA). And maybe not even below the $480 range. There are so many savvy Asians and Mideast investors out there with big money. They now see the writing on the wall and wish to get their wealth out of fiat paper that the governments of the world are so corruptly spewing out in a last gasp effort to shore up their fascist regimes of economic control. The cold alarming truth is setting in, albeit slowly, but it is setting in. Momentous and dangerous times we live in. 

[What is written here should not be considered as investment advice. I am not a registered investment advisor. Readers must do their own due diligence before investing money. Markets are always risky and therefore should be approached with prudence and caution.]

Nelson Hultberg

Americans for a Free Republic

December 19, 2005

www.afr.org

hultberg@afr.org

Nelson Hultberg is a freelance writer in Dallas, Texas and the Executive Director of Americans for a Free Republic www.afr.org. His articles have appeared in such publications as The Dallas Morning News, Insight, The Freeman, Liberty, and The Social Critic, as well as numerous Internet sites. He is the author of Why We Must Abolish The Income Tax And The IRS (1997) and Breaking the Demopublican Monopoly (2004). He is presently finishing a book on political-economic philosophy entitled The Golden Mean: The Case for Libertarian Politics and Conservative Values.