PM End of Week Market Commentary - 7/24/2015

davefairtex
By davefairtex on Sat, Jul 25, 2015 - 11:55am

On Friday, gold rose +9.00 to 1098.40 on massive volume, while silver  climbed +0.10 to 14.71 on heavy volume.  Both metals made new lows on the day, but ended up reversing into the green, printing some nice-looking hammer candles.  This is the sort of thing we like to see after a long decline - massive volume, especially for gold, and a clear reversal bar.

By end of day, traders were pushing prices ever-higher, seemingly eager to take gold and silver home for the weekend, setting up a potential follow-through rally on Monday.  Silver even closed at the high for the day.  When was the last time you saw that happen?

On the week, gold fell -33.90 [-2.99%], silver fell -0.10 [-0.68%], GDX dropped a massive -8.69% and GDXJ lost -7.63%.  Platinum was down -0.41%, while palladium actually rose +1.70%.  Miners had a bad week, but several of the metals actually ended up doing fairly well.

Gold sold off hard at the start of the week, a short-gunning attack resulting in a $50 downspike that drew very little dip-buying at the COMEX in response.  It was clear after a couple of days that we would have to go lower to find support - which happened just today.  Friday's hammer candle on extremely high volume shows COMEX buyers appeared on the dip below 1080.  All we need now is a close above 1101 on Monday to print the swing low, which I think is more likely than not to happen - if not Monday, then hopefully on Tuesday.

Silver's print on Friday was, if anything, prettier than gold's, since silver closed on the highs of the day, which is always nice to see if you're looking to go long silver.  This makes it extremely easy to print a swing low on Monday - we just need a close above today's high of 14.71.

The USD

The dollar fell on the week, dropping -0.64 [-0.66%] to 97.35.  Dollar weakness didn't materially help PM or commodities, which seemed to be headed lower until the rebound today.  If the dollar weakness continues into next week, that should aid the recovery of both gold and silver.  Conversely, renewed dollar strength next week might put a crimp in the whole swing low plan I have for PM.

Miners

Senior miners more or less collapsed on Monday, dropping 10% on extremely heavy volume, and the rest of the week showed a pattern of continuing weakness until Friday afternoon.  Once the miners realized gold was recovering on Friday, they joined the party and moved higher.  The senior miners aren't out of the woods just yet needing a swing low to mark the reversal, but the strong move on extremely heavy volume is a positive sign that underlines gold's recovery on the day.  If gold had printed its candle but the miners didn't rally, that would be a bad sign - but the miners definitely responded, which is good.

Junior miners outperformed the seniors again today, printing what's known as a "bullish engulfing pattern."  That's where the price drops lower than yesterday's low, but then rises higher than yesterday's high - with today's candle basically "engulfing" yesterday's print.  This is a bullish reversal pattern which suggests the low is in for the juniors.  The massive volume places emphasis on the whole picture.  Its like the market is saying, "we're really not kidding about this one, guys."

We're four-for-four on positive signals from PM and the miners on Friday.

US Equities/SPX

The equity market had a bad day on Friday, selling off -22.50, diving below its 50 MA.  On the week, SPX dropped -46.99 [-2.21%] to 2079.65, dropping 4 days out of 5.  On the week, SPX printed a Bearish Engulfing candle, rising slightly higher than last week's high but then closing lower than last week's low.  VIX rose +1.79 to 13.74.  Also, on Tuesday SPX printed a swing high.  These are two signs of a top for SPX.  We've had top calls so many times we're all worn out expecting the market to drop, but its my duty to report them, so I do.  Something I've noticed is, when I get tired of buying puts, its not long afterwards that the market actually tips over and sinks.  Its just how these things work.

Once again, buying puts below VIX of 12 on Friday of last week would have been a good thing to do.  I wish I had done it.

Where does SPX go from here?  For the past year and a half, gold and SPX have been strongly negatively correlated: correlation of -0.88, which is almost as inverse as it gets (-1.00 is the max).  That means, whenever SPX rises, gold drops - and vice versa.  So if gold rallies, we might expect to see SPX correct, if that correlation is maintained.  Perhaps its a money flow thing; money chooses to rotate into gold (a beaten-down sector) every time it seems that SPX (a sector at its highs) is in danger of correcting.  Its a thought anyway.  Over all of history that correlation isn't always true, but as I said its been in place for the last 18 months.

Gold in Other Currencies

Gold had a really bad week, dropping in all currencies - even the Ruble, which itself had a bad week too.

Rates & Commodities

Bonds (TLT) rose +2.25%, breaking out of its recent consolidation and rallying 4 days out of 5 this week.  It looks like money is flowing from stocks to bonds.

Junk bonds (JNK) had its first really bad week in a while, dropping -1.36% and printing a nasty red candle.   JNK dropped below support and now looks to be in a bit of a free fall.  JNK is distinctly signaling "risk off" - if true, we might expect further downside movement from SPX.  Falling oil prices probably has something to do with the junk bond selloff too.

The CRB (commodity index) had a horrible week, dropping -4.43% and falling below the lows set in March.  Unlike gold, CRB dropped on Friday as well, losing -0.93%.  If commodities keep dropping, gold will have to swim upstream to rally.  Let's hope commodities will find a low soon.

WTIC dropped for the 4th week in a row, losing -2.82 [-5.55%] to 47.96.  Oil continues to make new lows.  After losing 50 support, oil looks like it might be headed to test the lows of 42 set back in March.  Boy would that devastate oil equities, which are lower now than they were back in March.

Physical Supply Indicators

* Shanghai premiums rose to +5.85 over COMEX.

* The GLD ETF lost -16.10 tons, with 680.15 tons remaining.

* GC futures are almost in backwardation, with the current two front-month spread at just +0.10.

* ETF Premium/Discount to NAV; gold closing (15:59 close price on July 24th) of 1098.10 and silver 14.64:

 PHYS 9.04 -0.58% to NAV [up]
 PSLV 5.68 +0.51% to NAV [down]
 CEF 10.53 -10.66% to NAV [down]
 GTU 38.24 -5.39% to NAV [up]

ETF premiums were mixed.  If you want silver, PSLV looks like a decent buy right now; its +0.51% premium beats the heck out of a 15% premium of silver eagles - or whatever it is they cost now that the mint has stopped producing them for a time.

* Bullion Vault gold (https://www.bullionvault.com/gold_market.do#!/orderboard) shows no significant premium for gold; spreads are a bit wide for silver, but no significant premiums.

Futures Positioning

The COT report covered trading through July 21st, when gold closed at 1103.50 and silver 14.77.

After Monday's massive sell-off, commercials closed a huge 21k shorts, while managed money increased their short position by 10k.  We're even readier for a rebound now than before.  Everything is in place from the point of view of the COT positioning.  Managed money is at the highest short positioning in the history of the series.

Silver didn't change all that much - managed money picked up a few more shorts and remains overextended - as with gold, at the highest level of short interest in the series.  Commercials confirm by continuing to close their short positions.

Moving Average Trends [9 EMA, 50 MA, 200 MA]

We're still a sea of red, with prices below all the moving averages, and the moving averages all dropping.  You can't get more bearish than that.

Name Chart Change 52w ch EMA9 MA50 MA200 50/200 Last Crossing last
Junior Miners GDXJ 5.24% -52.08% falling falling falling falling ema9 on 2015-06-22 2015-07-24
Senior Miners GDX 3.30% -45.70% falling falling falling falling ema9 on 2015-06-19 2015-07-24
Silver Miners SIL 2.29% -50.99% falling falling falling falling ma50 on 2015-06-23 2015-07-24
Platinum COMEX.Platinum -0.04% -33.29% falling falling falling falling ema9 on 2015-07-06 2015-07-24
Gold COMEX.Gold -0.79% -15.90% falling falling falling falling ema9 on 2015-06-30 2015-07-24
Silver COMEX.Silver -1.40% -28.95% falling falling falling falling ema9 on 2015-07-13 2015-07-24

Note: the data service I use show that the prices for gold and silver both closed down on Friday, but that's actually not the case.  The official "closing time" for the futures markets is earlier in the day - I think maybe around 13:30 EDT - and a good chunk of the big rally in gold came after that.  Gold moved from 1085 to 1098 from 13:30 EDT through to 17:15.  Stockcharts and my trading apps show the close as 1098.40, while the official gold close was 1085 and change.

Summary

It was a terrible week for PM and commodities - starting with a gold smash on Monday that harkened back to the spring of 2013.  Commodities just continued selling off for the rest of the week, and PM looked weak - right up until Friday afternoon when gold and silver printed a pair of hammer candles on massive volume.  The mining shares responded too, chiming in with their own strong rallies off the lows.  It was a hopeful ending to a bad week.

The gold/silver ratio fell, dropping -1.78 to 74.67, with the ratio retreating from extremely bearish levels.  The GDX:$GOLD ratio was smashed again this week, but may have put a low in on Friday.  The GDXJ:GDX ratio continued climbing on the week - I have to say, juniors continue to be the preferred miner choice.  If/when the PM complex bounces, it will be interesting to see if the juniors continue to outperform.

The COT reports show an increased bullish positioning for gold, and a continuing bullish positioning for silver.  After Friday's positive showing, the market appears primed for a strong move higher Monday based on the historic number of short contracts that Managed Money has open.

Physical demand is somewhat positive;  in the west, ETF premiums were mixed, GLD tonnage fell significantly, and there is an almost-backwardation at COMEX.  In the east, premiums in Shanghai are increasingly positive.

Commodities continue to fall; oil, copper, cocoa, corn, wheat, most commodities are down hard this week.  This performance is particularly bad given the modest dollar weakness.

Yet in spite of this, somehow PM managed to rally on Friday, and on high volume too.  The high volume lends added emphasis to the rally.  In order to provide a relatively clear buy signal, gold and silver need to close above Friday's high.  A higher-risk signal is if gold and silver prices move above Friday's high intraday - however, we have seen many times how an early rally ends up fading by end of day, and so such a buy signal tends to give a lot of false positives during a downtrend.

Still, with such a clear high volume hammer print, I think its more likely than not that if the market can move above Friday's high, we will end up with a bona fide rebound.  I might not wait until the close to buy.  Its not a sure thing, but I feel it is probably a risk worth taking.  Once PM launches, given the historical number of managed money shorts, the initial breakout could be quite strong.

Bottom line though: we must wait until Monday to see if the market can continue moving higher, but if you feel like taking on more risk, buy on a move above Friday's closing price.

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14 Comments

davefairtex's picture
davefairtex
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gold breakout

And we have a gold breakout - nothing too dramatic, but a brisk drop in the buck [down -0.43 to 96.91] encouraged gold to move higher, and its now trading at 1102.30.

As I said in the weekend report, a close on Monday above Friday's high of 1100.90 will mark a swing low for gold, and based on my analysis, should be a reasonably high probability reversal signal for PM overall.

Let's see how it does in London.

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stevejermy
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Dave, Thanks for these market

Dave,

Thanks for these market overviews, they're invaluable. Like Chris and many others, I've been trying to understand the recent developments in gold, which seem perverse given the global financial crisis we see emerging all around us.

My (current) best explanation goes along these lines. We're in a Central Bank inflated bubble, that is actually masking not only financial deflation but also and more importantly economic contraction. This contraction is the start of the reduction in global economic output, forecast in Limits to Growth, and will be protracted as the driver is dwindling global energy supplies. Based on an model that I'm still working on, my current predictions for cumulative global GDP contraction are: 9% by 2020; 23% by 2030; 63% by 2050.  

Key markers that this contraction is already underway include: downturn in China's GDP; sharp reductions in commodity prices, Baltic Dry Index and oil prices. The contraction will continue, irrespective of economic policies, because it is driven by physics not finance.

The critical moment will be when the markets wake up to key implications of this, namely that: first, the e in the p/e ratio is heading south; second, sovereign governments will not have the growth to pay their debts. At this stage, we'll see: probably, first, a number of massive market corrections in equities and bonds, leading to a corresponding financial crisis as the over-leveraged position torpedoes many supposedly safe financial institutions; possibly, second, sovereign governments stimulate in responsive policy panic, leading to fiat currency collapses.

For gold and other PMs, we'll know when the markets are at last "getting this" when we see gold and real commodity price trends diverge, as commodities continue to follow the downward economic contraction, whilst gold trends upwards as a safe haven in the consequent financial reset.

Based on the original Limits to Growth modeling, I've been guessing that 2017 will be year when this comes to climactic head, but it could be plus or minus two years on that date.

 

sand_puppy's picture
sand_puppy
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Shanghai Composit falls 8% Overnight

Chinese Stocks Suffer Second Biggest Crash In History, 1,500 Companies Halted Limit Down

After pledging, investing and otherwise guaranteeing the Chinese stock market to the tune of 10% of GDP, and intervening on at least 40 different occasions in the past month ... overnight China officially lost control for the second time, when after a weak start to the Monday trading session, things turned very ugly in the last hour, when the Shanghai Composite plunged by 8.48%.

Jbarney's picture
Jbarney
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Mainstream Press not giving it much Press

http://money.cnn.com/2015/07/27/investing/china-stocks-shanghai/index.html

 

It is early yet, but I had to search for the story on CNN.  Of course it is early yet.

I look forward to a piece by Chris on the subject. :)

 

JB

Jbarney's picture
Jbarney
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Mainstream Press not giving it much Press

http://money.cnn.com/2015/07/27/investing/china-stocks-shanghai/index.html

 

It is early yet, but I had to search for the story on CNN.  Of course it is early yet.

I look forward to a piece by Chris on the subject. :)

 

JB

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Time2help
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That's got to hurt
sand_puppy wrote:

Chinese Stocks Suffer Second Biggest Crash In History, 1,500 Companies Halted Limit Down

After pledging, investing and otherwise guaranteeing the Chinese stock market to the tune of 10% of GDP, and intervening on at least 40 different occasions in the past month ... overnight China officially lost control for the second time, when after a weak start to the Monday trading session, things turned very ugly in the last hour, when the Shanghai Composite plunged by 8.48%.

Can you imagine the S&P downing 8.5% in a day?

Going to be interesting to watch "the markets" put things "back together" today.

KugsCheese's picture
KugsCheese
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sand_puppy wrote: Chinese
sand_puppy wrote:

Chinese Stocks Suffer Second Biggest Crash In History, 1,500 Companies Halted Limit Down

After pledging, investing and otherwise guaranteeing the Chinese stock market to the tune of 10% of GDP, and intervening on at least 40 different occasions in the past month ... overnight China officially lost control for the second time, when after a weak start to the Monday trading session, things turned very ugly in the last hour, when the Shanghai Composite plunged by 8.48%.

China is US 1929-1932.  Ground Hog Day.

KugsCheese's picture
KugsCheese
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I am just finishing up "The

I am just finishing up "The Bubble That Broke The World" about ~ 1917 -1934 (http://www.amazon.com/Bubble-that-Broke-World/dp/1578987636/).  It is amazing how the bankers and politicians never learn.   Just maybe there is something we don't see.   Follow the money...Why would this behavior continue?  Someone is winning.

davefairtex's picture
davefairtex
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shanghai down 8%

SP-

Thanks for the note!

Looking at the intraday chart, it definitely agrees with what the news was saying: "last hour selloff".

Guys, this is why I say the government cannot effectively control the market.  This isn't "evil short sellers" causing the damage, its just trapped longs looking to get out.  Government spent a bunch of money to support the market, there was a nice rally, and a bunch of traders (perhaps some of them on margin) decided that the price was good enough.  And once the selling started, trickle became a flood and down we go.

Lots of people imagine that the Fed has an even greater effective level of control over the US market.  They don't.  They are great at pushing rocks downhill.  Once traders in the US come to the same place that the Chinese are at, we'll see the same things here.

The Fed is terrified of exactly the same thing happening here - both in the stock and the bond markets.  Once Mr. Market wakes up and decides to sell off, things will simply go down, and all those people who imagine that Fed buying of futures contracts allows them a firm control over price will be in for a rude awakening.

That said - I think US is still the safe haven, so if anything money will flee from China to the US.  As a result, the (undeserved) Fed reputation for "market control" will remain intact.

"Market control" is illusory.  Only if you end up buying "all of it" do you have control.  And then - you really do own all of it.  And any attempt to exit will cause prices to plummet.  Large government ownership of the market creates concern by traders that the government will at some point sell their holdings - and that will cap prices.

Just my opinion, of course - but if China deliberately and obviously throwing a significant fraction of GDP at their stock market can't control price (alongside all the other measures they took), we imagine that the Fed buying some futures contracts on the sly works so much better?

davefairtex's picture
davefairtex
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gold weak today

Gold prices are quite weak today after Friday's big rebound.  The buck is off substantially, and gold is down on the day.  That's a bad sign.

Miners had a nice 40-minute rally at the open, but have sold off for the rest of the day and are now deeply in the red.  Maybe they'll recover by end of day - but I don't think so.

Quite possibly gold's weakness is because the commodity complex overall remains looking ill - GCC (the intraday indicator I use for commodities) is down -1.09% today, for the 10th straight day.

I don't think Shanghai selling off was particularly healthy for any of the markets, and right now, commodities seem to be using any excuse to continue selling off.

This is why its "lower risk" to wait for that close above Friday's high to mark the swing low.  Sometimes the market has one good day, but if it cannot follow through on the following day, its a sign that it is just not ready to rebound.

Swing low might still come tomorrow.  Same signal is required: we need a close above Friday's high (1100.90) to mark the swing low.

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Armstrong calling the gold bottom ?

http://news.goldseek.com/GoldSeek/1437940421.php

Famously controversial futurologist, economist and business cycle expert Martin Armstrong, who forecast ‘$5,000+’ an ounce gold for 2016 on November 7th 2009 more than five years ago, now says gold touched rock bottom last week.

His website comment last week said: ‘If we hold $1,084 for the weekly closing, then we can see a two week bounce and everyone will proclaim the low, so hurry up and buy more.’

Gold’s rising now

Gold bounced back to $1,099 at the close of last week, comfortably beating this bottom-marker and proclaiming the end of the recent sell-off. 

The precious metal has tested a critical 50 per cent retracement of its bull market run. That is to say it fell to the mid-point between its $1,923 top in 2011 and $247 starting point in 2000.

Dr. Armstrong’s doomsday downside to the gold price is now not going to happen. He had warned: ‘If we close below these numbers, then we can see a two week panic to the downside and a test of the 1980 high. If that unfolds, then the latter target may be further down. So we play it by the numbers.’

So will gold prices now head to $5,000-plus as the world enters a second global financial crisis of unimaginable dimensions? That is what this forecaster said would happen next year more than five years ago (click here).

He’s been right many times before, and his prognosis for the gold price outlook in 2009 was also very accurate… Back then he commented: ‘We should see a temporary high in 2010-11 with a retest of support in 2012-13 with a rally into 2016.’ He also got the ‘explosive rally’ of 2011 spot on target.

Debt deflation spiral

The crucial difference between Dr. Armstrong and most gold forecasters is that he has always argued that it would not be consumer price inflation that sent gold prices rocketing upwards but a general loss of confidence in governments and by extension paper money or sovereign bonds in a period of deflation.

And what are we seeing today as China deals with its stock market crash and the eurozone struggles with Greece? Deflation led by commodity prices and a loss of liquidity as bond markets dry up. The US is not going to be immune from these pressures, and is also carrying a huge debt. 

Gold may have just had its nemesis, the real problems are just starting for other asset classes.

In the comments section following the above article, several writers are saying Armstrong HAS NOT called this a bottom.  Upon reviewing his most recent blogs, I have to agree with them.  I'm still waiting for events which will clearly signal the beginning of the loss of faith and confidence in governments, central banks and their paper money.  Rising or falling prices for gold don't say much about that kind of psychological/spiritual change, at least not until gold starts skyrocketing upwards (such as a price rise of $100 or more on one day).  

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davefairtex
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armstrong and gold

Tom-

I agree with you, that wasn't Armstrong calling a bottom, that was Armstrong being snarky.

‘If we hold $1,084 for the weekly closing, then we can see a two week bounce and everyone will proclaim the low, so hurry up and buy more.’

Armstrong is only suggesting that a two-week bounce is possible because we held 1084 last week.  In context, he's suggesting that we also need to hold 1084 this week too, since a monthly close below 1084 may well lead to a test of 1000, and possibly below.

I have to say, I could see it.  If the Eurozone cracks up and commodities dive even further off the cliff, given the current set of correlations, gold dives off that cliff right alongside the commodity complex.

I continue to believe we'll probably have a rebound here, but the market needs to show me before I get too excited.  We need to see that swing low.

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For the record...

For the record, Adam and I have never been calling for anyone to hold gold as a hedge against the CPI either.  So we agree with Armstrong on that front.

In fact, to be quite fair, most gold analysts share that stance because, well, there's no data to support holding gold as a hedge against CPI.

Instead it's mainly a hedge against system, leadership, and institutional failure(s) that can combine to create a lot of wealth destroying uncertainty when too much has to be unwound and it does so too quickly.

Recent examples of places where holding gold would have served you well include: Zimbabwe, Ukraine, and Venezuela.

Of course, if you held dollars there you would have done just as well, but we are entering a time when even more people may connect with the idea that playing hot potato with a succession of fiat currencies that are all mismanaged does not make sense.  Owning the only monetary instrument that is not simultaneously somebody else's liability does make sense.

Why more people have not come to their senses is a real mystery to me.  I rather suspect they all think that they are more skilled at musical chairs than the next dude/gal.

That they all think this is yet another mystery...sort of a Lake Woebegone intro applied to Wall Street...

/Cue Garrison Keillor voice/

Wall Street, where all the 28 year old traders know everything, the pay is spectacular, and everybody is faster than everyone else...

 

davefairtex's picture
davefairtex
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gold, CPI, armstrong, promoters

For the record, Adam and I have never been calling for anyone to hold gold as a hedge against the CPI either.  So we agree with Armstrong on that front.

In fact, to be quite fair, most gold analysts share that stance because, well, there's no data to support holding gold as a hedge against CPI.

I agree with your read on the data regarding the CPI, but I'm not sure I agree with the bits in bold.   From what I can see, a large percentage of who Armstrong calls "the gold promoters" (people who make a living selling gold) appear to have three ways to look at gold:

1) Gold is a hedge against inflation.  Common bits of evidence used are what the USD could buy back in 1913 when the Fed first started, and what it can buy today.  Long term it makes for a compelling argument especially during the long credit expansion of 1960-2008, but if that isn't a CPI-based recommendation, it is a very close cousin.

2) Value of gold should be based on the size of the money supply.  A simple mathematical relationship is proposed: money supply is $X trillion, therefore, gold should be some ratio of that money supply.  This yields results such as gold being fairly valued at $10,000/oz, or $50,000/oz based on a very simple equation.  [The corollary: when BASE climbs and gold doesn't, manipulation is the only possible explanation]

3) Gold is the only true money out there.  All fiat money systems eventually collapse, so its best to hold gold.

Item #1 is sometimes true, and sometimes not.  Over the multi-cycle (100-year) timeframe, it seems to hold.  Shorter periods (20-30 years) tend to be more problematic.  In particular, the period 1981-2000 is ignored by these people - or the price movement is explained as manipulation.  That's always the go-to explanation for any divergence between expected behavior and real world observation.

Item #2 is just a one-dimensional view of the world.  Based on my observation of how things work, value of currencies are based on economic confidence, productivity, interest rates, where we all are in the business cycle, relative performance between nations, and confidence in government/rule of law, not on simple money-supply ratios.  Invoking manipulation to explain the breakdown in the Gold/BASE ratio is the usual explanation for a poorly working model.

Item #3 confuses cause with effect.  While the second part is eventually always true, the rise and fall of currencies is driven more by cycles, government, and relative national power than it is about fiat vs non-fiat.  Society, productivity, and (perceived) rule of law are the drivers, and the value of the currency is the side effect.  CHF is a case in point: not backed by gold, but "everyone knows" the Swiss national character and so the currency is strong as a side effect.  Rather holding to a simple article of faith that "all fiat currencies will eventually fail", its probably more immediately useful to understand why some currencies are strong, and others are weak, and that none of it has to do with whether the currency is backed by some commodity.

Armstrong makes the point that it is futile to try and peg a currency to a commodity - if a national government is determined to be feckless, no peg will stop them and the peg will eventually snap.

Don't get me wrong, I think gold is a great insurance policy against bail-ins, a banking system accident, and some reflation event that might happen in the future.  But I'm not holding gold because I believe its the one true money, or because M2 happens to be 12 trillion.  Cyprus or Greece could someday happen here; I have fire insurance on my house, and I think of gold as insurance on my bank deposits.  Gold is concentrated portable wealth, recognized internationally.  These are useful properties if you want a hedge against government misconduct, and I think we can all agree, government misconduct is one thing that is not in short supply these days.

That doesn't mean you have to believe everything those gold promoters say, however!

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