Thomas Henning: Musings of a Stock Market Curmudgeon

Gold:
What the game
is all about, Part I

       The world's economies are playing a currency game with Monopoly money built on a bubble foundation of debt. The game is played in a world-wide casino against the house, the house being a bunch of bankers taking their cut out of every pot, every transaction.
       The problem with the game is that, when the debt backing the Monopoly money fueling the game becomes too onerous to service, the Monopoly money becomes totally worthless. Implode the debt; implode the money; implode the markets; implode the game. Bubble burst.
       As in chess, we're in the end game. The probable implosion scenario has been articulated in the past. However, for sake of perspective, I'll run through the scenario again.
       The bond market cracks downward. Interest rates rise. The in-hock crowd will not be able to service the debt because of higher rates, and they will begin to default. The default will undermine the debt paper. Asset liquidation will be forced, which will cause asset values to decline, especially in real estate. This, in turn, will trigger more liquidation, causing a general asset implosion. The debt paper will become worthless as banks, along with Fannie and Gennie, become insolvent and fail. Profits will evaporate, markets implode, tax receipts implode, and the free lunch will not get paid off. Kiss off the pension funds. The bubble bursts.
       The Fed-babbling fools running the game will be impotent to stop the bubble burst for two reasons. First, having been schooled in the theology of Fed-babble since 1913, an implosion is totally beyond their comprehension. Secondly, if they even understand what is occurring, they will lack any tool to fix the problem, the problem being a cave-in of debt in a world economy built on paper money. The worthless Monopoly money that they're accustomed to using has been created out of thin air with a bookkeeping entry. These fools will be slobbering in denial, in a total void, for their identity, the very basis of their existence, will have evaporated. Their mythology will have been blown up by the reality of money, the reality of excessive debt default.
       This implosion scenario is rather obvious to any savvy player who doesn't worship at the altar of Fed-babble. However, one must look beyond the obvious. Enter the gold grab, which is what the game is all about.
       A few years ago, the British banking authorities sold off roughly half of their gold. Russia and other countries also liquidated a lot of gold. Reportedly, Britain bought Third World debt. No doubt some hustler made a good buck on that scam and ended up holding a big pile of gold.
       Given that gold has been a store of value intrinsic to the human economic psyche since before Adam and Eve, this gold sale raises a question. Are the gold sellers simply stupid, or is there some kind of a cabal afoot to strip the world's treasuries of gold for further sinister economic motives? To assume that the simultaneous gold sale by various countries was a coincidence is a bit beyond belief.
       What has occurred, either by stupidity or cabal, is a stripping of gold from treasuries leaving little other than a shallow morass of floating currencies backed by debt with a bunch of bankers collecting the vigorish in the transfer process.
       The next obvious and fair question is why does one suspect that this gold-stripping job is a little beyond coincidence? The answer is simple. That's the way the money flows, and truth and reality are defined by money flow. Simply put, this is what has happened.
       The savvy player shouldn't fret about this hustle, but instead, should position himself to get a piece of the action, to make a buck and survive. To try to change anything is a foolish exercise in Don Quixote windmill waving. Let's follow the scenario in the markets starting with the main trigger, the bond market.

       The bond market has waved up in a cyclic bull market that started in August, 1982. The final upleg of that bull cycle started in 2001 and evolved a 5-wave upleg as marked.
       Near term, the final 5th wave is terminal with a Weekly Stochastics sell signal flashing in harmony with a Daily Hard Momentum breakdown. In other words, the bonds are hanging on by bloody fingernails. A clean close at 109 or lower, basis the spot month, would bust the Weekly Hard Momentum downward setting up a probable break below the recent June 102 low.
       In harmony with the bond market is the two-year-long implosion of the Dollar Index, which has been grinding down foreign holders of U.S. Bonds in the currency exchange rates. Given a close below the 109 area by the bonds, these foreign holders will enjoy the double whammy of a falling Dollar and falling bonds. In that vein, the Japanese have been trying to knock down the Yen, crank up the Dollar, which has been flirting with its lows because these boys know that if the dollar busts, a bond deluge will follow. Given that their banks have been insolvent for some time and that they're long bonds up to their noses, a bond deluge is the last thing they want to see.
       Gold, the next piece of the scenario, has been under accumulation since 1998. As the gold has been sold off from the central banks, it bottomed and kicked off a cyclic bull market as suggested by the Monthly XAU chart. The question arises as to who is doing the buying. I suspect that it may be the same gang who are stripping the gold from the treasuries. At this point, one must apply the old H.L. Mencken adage, "Always assume the worst in people. You will almost always be right." Besides, one can always trust greed.
       Near term, the Elliott Wave count has been pure chop suey, but the volume studies and various ratios have confirmed the strength, so the only tactic would be to enjoy the trend. If the buck follows through to the downside with a bond bust, don't be surprised to see a panic into gold. We'll see.
       One caveat: I do have one near-term count that suggests a potential two-month decline, but given that the "trend is your friend," one must stay with the trend.
       The stock market has been in a 22-year-long cycle since August, 1982. The bubble burst of the blah blah stocks was only a correction within the cycle. The cycle is mature.
       In past issues I've waved out the pattern using the Advance/Decline Line identifying the 2002 low as a bottom suggesting another upleg in the larger cyclic wave count, which indeed has evolved. The upleg off of the 2002 low should be the final wave up in the larger pattern that started in 1982. Refer to the Weekly Value Line Index and note that the upleg off of the 2002 low has a fairly clean 5-wave pattern as marked with the 5th being the final leg. When the current upleg is complete, the larger pattern that started in 1982 will be complete, and, given the Elliott roadmap, a decade-long cyclic bear market should follow, which harmonizes with the Bond, Gold and Dollar picture.
       To sum up the situation, the world is in hock up to its neck, with a bond market having completed a cyclic bull market that started in 1982. A bond close below 109 would signal the start of a cyclic move down in bonds, a cyclic move up in rates, which will put the screws to the in-hock crowd making private and public debt unserviceable, forcing default and liquidation. Given a bond breakdown below 109, foreign holders of bonds will be pressed to liquidate, which will be aggravated by the weakness in the Dollar.
       Meanwhile, gold has been stripped from the world's treasuries, either through stupidity or cabal, thus making paper money worthless and, by default, making gold more valuable as money.
       The stock market has completed a 22-year cyclic bull market, save for some possible near-term strength to wave out the recent final upleg off of the August low. This will probably be followed by a cyclic bear market in harmony with the bond and dollar implosion.
       While the various central bank bubblers have been hustling a buck with their transfer scam using Monopoly money, the gold has been stripped from treasuries, as gold has been accumulated in the market for about the last decade. Gold, that's what the game is all about.
       Editor's Note: Thomas Henning is a regular contributor to the Bull & Bear Financial Report.

Also Read: Gold, What The Game Is All About, Part II

Also Read: Gold, What The Game Is All About, Part III

Also Read: Gold, What The Game Is All About, Part IV