Gold CAN Still Go Down; Trading Against Jim Rogers and Richard Russell; Worst Case Scenarios Already "Priced In"

So Gold CAN Still Go Down, After All

Last week was shaping up to be another banner one for gold, as the old relic kept on climbing, day after day...that is, until it stopped.

Gold's one-way rise experienced a sharp setback on Friday, dropping nearly $50 on the day, and over $60 in intraday measures.

Friday was the biggest down day for gold in some time.

(Source: Barchart.com)

Perhaps related, perhaps not, The Financial Times reported on Wednesday that China is wary of the danger of a gold "bubble" (hat tip to my good friend and regular reader Super Joe for sending this link along).

Hu Xiaolian, the vice-governor of the central bank, said Beijing would not buy gold indiscriminately.

“We must keep in mind the long-term effects when considering what to use as our reserves,” she said. “We must watch out for bubbles forming on certain assets and be careful in those areas.”

China announced this year that it had quietly doubled its gold reserves to 1,054 tonnes, the world’s fifth largest holding. India has also joined the rush, gobbling up half the IMF’s gold sale.

China's ever-increasing interest has spawned the popular gold bull theory that the Chinese have established a "$1,000 floor" price for the metal. In other words, with the Chinese buying up more gold on the dips, one needn't worry about the possibility of gold ever dipping down to triple-digit territory ever again.

The only problem with theories like this is that, however sound they may appear, they are usually wrong. The market takes great delight in squashing "absolute" myths and theories, and I suspect this one will be no different.

But - you may interject - with the government printing money like it's going out of style, won't that result in rising price inflation, and rising gold prices? It sure may - I just suspect that it will take longer than most investors anticipate, thanks to the massive amounts of credit that will be written off in the coming years, resulting in some wicked near-term debt deflation.

Trading Against Our Hero, Jim Rogers

Anytime you find yourself on the other side of the trade from Jim Rogers, you probably want to seriously reconsider your position.

That's where we find ourselves now, though, with Rogers continuing to reiterate his distaste for the dollar. To be honest, I don't like the dollar fundamentally either, but believe that paradoxically, it's due to rise in the near term because of its inherent flaws.

In other words, I agree with everything Rogers says, except for his timing. We'll see who's right - I wouldn't blame you one bit for siding with Rogers - but I'm sticking to my guns on this one...at least for now.

And...Richard Russell, While We're At It

The Great Richard Russell believes that gold is going to move higher, no matter what happens, according to The Daily Crux.

Question -- What would it mean if Industrials and Transports broke out to joint new highs?

Answer -- I think it would mean that the Bernanke Fed was beginning to win the war against deflation, and assets were once more beginning to inflate. In that case, gold should move higher.

Question -- What would it mean if this advance topped out, and the bear market was taking over again?

Answer -- I think it would mean that the Fed had lost its battle against inflation. If that was the case, I believe the Fed would spend even more, there would be even more stimulus programs and interest rates would remain at zero "for the duration." In that case, gold should move higher.

(Source: The Daily Crux)

Well I hate to trade against Russell too - a true legend. But, the dollar bull/gold bear camp is so deserted, that I guess it just comes with the territory that our favorite investors will be on the other side of the trade...because there are so few on our side!

Why Worst Case Scenarios are Already "Priced Into" These Markets

Tom Dyson, one of my favorite investment writers/analysts, is also one of the very few lone soles left in the debt deflation / dollar bull camp (last one out, please turn out the lights!)

Last week, Tom penned an article that I thought articulated the case for a near term dollar rally brilliantly - and our good friends at Stansberry & Associates were kind enough to allow us to reprint the piece in it's entirety here.

Positions Update - Still Really Short the S&P, Long the Dollar

Nothing's changed here - still waiting for the dollar to bottom, and the S&P to top. It's been a maddening wait.

We think the dollar is the lynchpin to the whole equation, and that a dollar bottoming should roughly coincide with a top in the other markets. Friday was an encouraging sign, as the dollar rallied sharply. Has it finally put in a low? We shall see!

The dollar rallied sharply on Friday to end the week - did this mark the start of a mega-rally?

(Source: Barchart.com)

Though this rally appears to be running on fumes, it's still running...at least for now.

(Source: Barchart.com)

Open positions:

Thanks for reading!

Current Account Value: $17,217.50

Cashed out: $20,000.00
Total value: $37,217.50
2009 Returns: Ugh, too depressing to calculate right now...

Prior yearly returns:
2008: -8%
2007: 175%
2006: 60%
2005: 805%

Initial trading stake: $2,000

Dubai's Meltdown; Liquidity Flows Make the Markets; S&P Fair Value

Dubai's Meltdown

The Thanksgiving holiday is traditionally a very slow time for the markets...not so this year! Dubai rocked the financial world with its announcement to debtors that it needed a bit more time to make good on outstanding debt payments.

Uh oh - here we go again?

Global markets reacted quite violently to the news, throwing up with the vigor of a hungover Wet Wednesday reveler. The real news here is not Dubai in and of itself - a debt bender from a pretty small country can't do that much damage alone to the global financial system. But, if this is a harbinger of more sovereign defaults to come, then now may be the time to beat the Holiday investor crowd and check into the debt rehab clinic!

Is fear back in the markets? It's been a bear market in fear since the March lows - perhaps it's time for fear to bounce back. This week will sure be interesting.

What happens if fear bounces back? We've seen this playbook before, as Mr. Market has already given us a sneak preview...

All Markets are Driven by Liquidity Flows

Friday was a classic fear driven day lately, with the dollar rallying, and everything else dropping. This is the "All The Same Markets" theory we've been following closely for most of 2009, originally popularized by one of our favorite gurus, Robert Prechter.

Most people see that the asset markets are interconnected - it's the old reflation/deflation trade. But, why does the dollar move counter to all of these other markets?

The "flight to safety" explanation is a popular one, and I personally think it's as wrong as it is popular.

The reason the dollar rallies is not because it's perceived a safe currency, but paradoxically because it's the sickest one. The reason is that most of the debt in the world is denominated in US dollars. When that debt goes "poof" - that is, the borrower defaults, and the money that once was there ascends up to money heaven - the supply of money goes down.

When liquidity tightens, this debt can go "poof" in a hurry, as we saw during the last leg down of the stock market. This is highly deflationary. And, because most of this debt is denominated in dollars, the supply of US dollars drops, and the value of each remaining dollar goes up.

But Can't the Fed Print Money and Reflate?

Yes, but there are limits to what the Fed can do, at least in the short term. Even an expert money printer like Ben Bernanke has constraints - he's only human, after all.

When you consider the sum of outstanding credit is somewhere in the neighborhood of $50 to $100 trillion (give or take a trillion or ten), it makes the money the Fed has printed so far (a trillion or two) pale in comparison.

Can the Fed inflate eventually? Sure - but probably only after all of this bad debt has been destroyed. This could take a few years, and there will be some wicked asset deflation in the meantime.

(For further reading, check out Terry Coxon's article: When Will Inflation Really Hit Us?)

First Dubai, Then Greece?

Greece is warming up in the on deck circle, as it tests the levels of sovereign debt, writes Ambrose Evans-Pritchard for the Financial Times.

Evans-Pritchard reports that Greece is "disturbingly close to a debt compound spiral," - and the bond vigilantes appear to be circling the wagons.

S&P Fair Value: Lower Than Current Levels

My good friend, regular reader, and private wealth manager Jonathan Lederer put out an excellent quarterly update for his clients last week, in which he analyzed the valuation for the S&P 500.

Jonathan is a very sharp value investor who has the patience and insight to perform excellent valuation analysis on equities. I always benefit greatly from absorbing his research, which is often a great counterbalance to my views.

He's been kind enough to allow me to share his presentation with my readers, which you can view here...I would definitely recommend you spend some time to watch his quarterly update.

Spoiler alert: Jonathan concluded that the market valuations are a bit rich at current levels, which concurs with my thinking and belief that the market risk right now is to the downside.

Positions Update - Still Really Short the S&P, Long the Dollar

And we continue to wait for these trades to go our way...was Dubai the opening shot in the next wave of deflation? The next week should be quite interesting!

Was last week's downtick the bottom for the dollar?

(Source: Barchart.com)

The S&P rallied off it's deep lows on Friday, but still closed down big on the day.

(Source: Barchart.com)

Open positions:

Thanks for reading!

Current Account Value: $19,711.95

Cashed out: $20,000.00
Total value: $39,711.95
2009 Returns: Ugh, sick of calculating, too depressing!

Prior yearly returns:
2008: -8%
2007: 175%
2006: 60%
2005: 805%

Initial trading stake: $2,000

Still All The Same Markets - A Picture Worth a Thousand Charts

This shot says it all - the "all the same markets" hypothesis is still in play.

Why bother with diversification when all the markets move in tandem?

(Source: Barchart.com)

Hat tip to Robert Prechter, who I believe was the first to point out the increasing correlation between every asset class, as far back as 2004. He postulated that the markets were being driven by global liquidity flows:

• When liquidity is plentiful (2004-2007), all the markets rise together, the dollar drops
• When liquidity dries up, the dollar rallies, all markets tank (2008 - early 2009)

Since March, we've seen liquidity increasing, and the dollar dropping - still playing according to script. So I think we have to assume this relationship is still in place, until proven otherwise.