Gold setup for major drop

[WallStreetHero]

There is a giant battle happening in the market right now. Let's call it "The Battle for $1,000 Gold."

Today, we take a close look at the fighting. As you can see in the chart below, gold made a run at $1,000 in early 2008. This "run" came at the end of a big move higher for gold in late 2007 (which coincided with a big move lower for the U.S. dollar). After taking a needed break, gold made another push toward $1,000 in June '08. The sellers beat it back. Gold made yet another push toward $1,000 in February of this year. Again, it was beaten back by sellers. The cycle repeated two weeks ago when gold kissed $980 and fell back.

The government knows gold in the quadruple digits sends a signal of "dollar trouble" to the world... so it would rather see gold much lower. And there are several conspiracy theories on how the U.S. government is holding gold prices back. We think they're far fetched...

But we can say for sure that markets are often like battlefields. One side fights to claim new territory, only to be thrown back by defenders. As you can see from today's chart, we have a full-blown battlefield in the gold market. On the "bull side," you have governments around the world debasing their paper currencies in order to bail out everyone. On the "bear side," you have major selling pressure that steps in to fight at the $1,000 line.

Our bet is on the bull side. After all, you could write the name of every historically successful paper currency on a hamster's left... ear.

 

[tripleogstar]

I agree with the idea that Gold will rally significantly, but my theory behind it is slightly different. Traditionally, gold mining firms hedge their output in advance through bullion banks. The traders at the banks hedge their risk by leasing gold from the central bank. This way of market making created an excess supply of 500tonnes each yr until the start of this decade. Low interest rates, or negative real interest rates, (particularly in the U.S) have caused this way of trading to reverse. So we are now in an environment in which there is 500tonnes shortfall of supply. This will lead to traders bidding up the limited supply of gold to hedge themselves. This is all of course under the key assumption that we will not go into a deflationary environment.