shamikbhose@rediffmail.com...sbhose@microsec.in // www.slideshare.net & www.linkdein.com The Great Gold Silver Ride......

Summer of 2012 Gold is sticking to the plan

. There's No Sensible Reason Not To Own Gold

My big theme of the past year has been that gold has been in consolidation mode, and that we would not see new highs before this autumn at the earliest. Gold made a mini-parabolic move last summer, which coincided with a panic (one of the many) over Greece. It finally spiked in September 2011 to $1,920 an ounce. It then corrected sharply by about 20% to $1,520, with many leveraged players losing their metaphorical shirts. The move towards $1,920 saw all sorts of mainstream coverage. But gold was simply doing what it has repeatedly done since this bull market began. It enjoys a run up, which might last some six or nine months and see gains of as much as 40% or 50%. Then it trades sideways for a while, retracing some of the move up and consolidating at these higher prices. The length of the consolidation period usually reflects the magnitude of the previous run up. You can see this illustrated in the chart below. For all the daily volatility, for all the squabbling, shouting and screaming, gold's rise over the last 12 years has actually been quite orderly. The black line marks the upper reaches of gold's channel. The dotted blue lines show the periods from an intermediate high in gold before it breaks out to a new high. The dotted red lines show the shorter periods from an intermediate high to an intermediate low which often occurs at the point of a previous high.

Gold's intermediate-term highs, most of them marked by the black line, have been at $293, $384, $430 and $450, $728, $1,033, $1,225 and $1,920. And each time it makes such a high, we go into

consolidation mode which is where we are now.However, the period between intermediate-term high and low as shown by the dotted red lines is considerably shorter. And the good news is it looks like we've made our intermediate-term low now at $1,520. Gold has re-tested that level now three times and each time it has held. At the MoneyWeek conference back in May I was dribbling on about how important that number $1,520 is. I'm delighted to see it has held, as I hoped it would. On this basis, we might still have several months before gold re-tests its old high at $1,920. I would also have thought it will take a few attempts to get through this level. Then again we might not. Gold, following the coat-tails of silver, is off on one of its runs again. It's gone through every level of resistance as though it wasn't there, rising every day by a percent or two (silver is actually up by over 20% in 30 days). A marked acceleration came last week with Federal Reserve chief Ben Bernanke's latest announcement. When gold goes on one of these runs nothing seems to stand in its way. Three reasons why gold might slip back in the short term That said, here are three reasons we might expect some sort of short-term pullback for gold.First, it is approaching a big line of resistance at just below the $1,800 mark, as shown by the red line on the next chart below.

Given the action we have seen since the end of July, I would wager that we are bound to see some kind of breather. There are so many traders who will have had such a good couple of months, profit taking is inevitable, even as soon as this week on the stocks as well as the metals themselves.Second, we always seem to see some kind of shake-out either in late September or early October. You can see this on Dimitri Speck's seasonal chart, shown below. (The chart basically shows that over the last 30 years, gold has generally had a fall during these months).

Third, there is a heck of a lot of bullish sentiment about gold and silver all of a sudden. Since the latest Fed announcement of apparently unlimited QE, a number of people many of whom I have great respect for are declaring that this is it, this is the beginning of the end-game, Von Mises' crack-up boom, here we come, and the like. (Crack-up boom refers to the economist Ludwig Von Mises oft-quoted line: There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as the result of a voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved.) If there is one thing I've learned, it's that this end-game is going to be a lot longer in coming than most of us ever expect. (I thought it was coming in 2008.) Markets can remain irrational a lot longer than you can remain solvent and all that. When you hear these kinds of pronouncements, it often pays not to listen to them. There's no doubt that the stances of the worlds central banks are extremely inflationary and bullish for gold. But the expectation for stimulus was, to at least a degree, priced in. Perhaps this is a moment to sell the news. To illustrate this excess of bullish sentiment I'd like to show you a long-term chart of silver (see below). Underneath it is the relative strength index (RSI), which compares the magnitude of recent gains compared to losses, in order to determine whether an asset is overbought or oversold. I have circled the RSI when it has reached similar levels to where we are today. On a short-term basis, silver is overbought.

Does this mean you should all run out and sell your gold and silver? Absolutely not. On a longer-term basis the RSI is actually quite moderate. But on a shorter-term basis, I would have thought some kind of shake-out is likely. But it will be like some short, sharp punch in the ribs. Enough to rattle everybody's nerves and cause a bit of pain. That's assuming it happens at all of course. Longer-term, I stick with my big picture call. We are still in consolidation mode, but we are starting to head out of it. The worst of the correction is over. Some kind of wake-up punch might be coming, but I'm hoping to see those $1,920 highs in gold re-tested before the end of the year, with a new high next year well into the $2,000s. Hat-tip to Moneyweek.com / MoneyMorning

There's No Sensible Reason Not To Own Gold Ray Dalio, one of the most successful hedge fund managers of all time, spoke with CNBC's Maria Bartiromo at the Council on Foreign Relations this morning. The hedge fund god made some interesting comments on gold. Here's what we've transcribed from his interview. (emphasis ours) "Gold is a currency. Throughout the history, I won't tell you in length, money

was like a check in a checkbook and what you would do was get your gold and gold was like a medium. So gold is one of the currencies-- We have dollars, we have euros, we have yen and we have gold. And if you get into a situation where there's an alternative in this world, where we're looking at 'What are the alternatives?' and the best alternative becomes clearly one thing, something like gold, there becomes a risk in that. Now it doesn't have the capacity. The capacity of moving money into gold in a large number is a extremely limited. So the players in this world that I have contact with that move that money really don't view gold as an effective alternative, but it could be a barometer and it is an alternative for smaller amounts of money. To this, Bartiromo asked if he owns gold. "Oh yeah. I do. I think anybody, look let's be clear, that I think anybody who doesn't have...There's no sensible reason not to have some. If you're going to own a currency, it's not sensible not to own gold. Now it depends on the amount of gold. But if you don't own, I don't know 10%, if you don't have that and that depends on the world, then there's no sensible reason other than you don't know history and you don't know the economics of it. But, I. Well, I mean cash. So cash...view it in terms as an alternative form of cash and also view it as a hedge against what other parts of your portfolio are. Because as traditional financial assets, and so and in that context as a diversifier, as a source of that, there should be a piece of that in gold is all I'm saying. "But anyway, in that notion, what I'm talking about here, in terms of your reflection, that putting aside gold, I don't want to draw an inordinate amount of attention toward gold, but I would want to say in this world of liquidity and the world trying to find out 'What is the place?' in which also think about it for basically you get no interest rate. So the question is, 'Is cash under the bed better than treasuries?' You could be quite close to cash being under the bed better than treasuries, right? Because essentially you know you'll get it back if it's under the bed or in a bank and they're not giving you any money on it anyway. And so when you're looking at an international investor, someone like I don't know a Chinese investor or something, and you say 'I'm going to do this and you're going to give me zero interest rate for that.' We are at one level and the question is 'does there become emerging some clear alternative?' And if there becomes a clear alternative we have to worry about that because that will be the notion of let's say Japan. If we think, in Japan, there's all this Japanese save and they buy their bonds and that can go on for a very long time and it can go on here for a very long time. The question is 'what are the alternatives?' and that is create shifts Hat-Tip to marketwatch.com
A Gold Silver Chart Break-out !!! In dollar Terms ; In rupee terms : Charts Technical breakout on daily / weekly / monthly basis............. August.......September 2012

If you've been waiting for a good time to buy silver, well... right now looks pretty good. Since topping out close to $50 per ounce in April 2011, silver has trended lower. In fact, as you can see in the chart below, silver is tracing out a giant descending-triangle pattern... This chart shows a series of lower highs... and a constant pounding of the support level at about $26.50 per ounce. If silver breaks the support line, it could create a sharp drop lower to the next support zone near $20. On the other hand, if silver holds support here, it could easily break out of this pattern to the upside... and we could see it trading at $35 per ounce. Aggressive traders should consider buying silver here with a very tight stop at $26.50 for a low-risk trade. You'd risk about $0.76 for an opportunity to make $7.50 or more.

But we have an incredible opportunity to buy silver.....today. As it surges from 27$ per ounces towards 32 $ closes at a high of 33.50$ this week in early Sept , the market though technically overbought is poised to correct and breakout yet again. It doesn't feel good to trade precious metals here. But here's the thing: Everyone feels bad about precious metals... Silver in particular. And that's why it's such a big opportunity. Based on history, we can expect to make 20% or more over the next three months... by simply buying silver today.Better yet, if this situation kicks off a new bull market like it has three of the last four times we have the potential to make even larger gains, as much as 100%, in the next six to 12 months. Let me explain...As I said, silver is hated right now. Specifically, futures traders speculating on silver are near all-time "short" levels today. As a rule, when futures traders all think the same thing, the market tends to do the opposite. You can see it in the chart below... When the blue line is high, silver traders are going long and we expect silver to fall. When the blue line is low, silver traders are short... The contrarian investment is to buy silver.

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You can see that silver traders are near all-time short levels today. In fact, we've only seen this extreme level four other times in the last seven years. Every time was a great opportunity to buy silver.If you bought silver the last four times it reached today's extreme, you'd be up an average of 20% over the next three months. All four trades were good for double-digit gains.Importantly, three of these four trades signaled the beginning of a fresh, longer-term uptrend in silver. Those signals led to even larger gains over the following months. Take a look... Trade Date 2005 2007 2008 Average 3-Month Gain 22% 16% 28% 22% 6-Month Gain 46% 64% 38% 49% Gain to New High 105% 71% 98% 91% Months Until New High 8 6 13 9

Of course, we can't know if today is the start of the push to new highs for silver. But 91% average returns in just nine months is enough to get me interested. If you do buy today, consider using a tight stop loss at SLV's recent low ($25.63). That's just 3% below today's price. But with 20%-plus upside and only 3% downside, it's an excellent risk/reward opportunity. Remember, silver moved higher each of the last four times sentiment got this negative. Our average gain was 20% in just three months. And if this kicks off a bigger move in silver, we could make much, much more.No one wants to hear about it... and the crowd says sell... So we're buying.

Gold is nearing a crucial level on 'The brink' is one of those phrases that keeps getting bandied about by all.....I'm never quite sure what it means. Greece is on the brink, they tell us. Europe is on the brink. In fact, since the global financial crisis began back in the halcyon days of 2007, rather a lot of companies and countries have been 'on the brink'. Iceland even went over it. But do you know what? After Iceland went over said brink, life carried on.

I rather wish all those other countries, governments and institutions with un payable debts would just get on with it and go over the brink. Then we could purge, move on and get this financial crisis over with. All these policies and loans and bail-out funds to pull whoever or whatever back from the brink do, is to delay the inevitable. Meanwhile, innocent bystanders get caught in the crossfire of volatility. And the rest of us feel like we're waiting in some kind of losses pending tray. Gold, however, was this week on the brink. On the brink of what? Well, on the brink of... going lower. I have drawn a red line on the chart below at $1,525 an ounce. That red line is your brink. Gold has tested that line three times now. It has so far proved support. I see it as a big, big level. And I really hope it holds.

Gold is in a downtrend now. It's been in a downtrend since last September. It edged lower in March and April, but that downtrend suddenly accelerated in May and now the moving averages are all sloping down. I'm hoping this week was the final capitulation, but I can't be sure. Why the $1,525 level matters We have to accept something. And that is that during the early stages of a financial panic, despite the fact that you might intuitively expect gold to perform well, it doesn't. 2008 proved that. And now we see it again. Government bonds are for now the perceived safe haven. I have no idea how long this will last. Given that most governments are wallowing in un - payable debt, it seems odd that their issuance should be a safe haven, but that is where institutions and fund managers and investors park their money not gold. How ironic that government bonds should be called 'gilts'.

Coming back to that $1,525 level in gold... Why am I so keen for it to hold ? This next chart shows gold since 2000. The blue line is the 252-day moving average. There are around 252 trading days in a year, so effectively that blue line is the average price for the past year. Since 2001, gold has only gone through that blue line and stayed there for a significant period of time once. That was in 2008.The problem is, these last few weeks it's done it again. It's sunk beneath.

I don't know about you, but I don't fancy another 2008..That's why I'm so keen for that red line to hold. If it doesn't I expect the next stop on the way down to be just above $1,400. After that we're looking at the $1,250 area, where, even in the worst-case scenario, I would hope for us to find a bottom. You can see why I am so keen for this $1,525 area to hold. While it does so, my theory that gold is in consolidation mode after its run up to $1,920 last September still holds. If it doesn't, I think we're looking at something more serious a meltdown of asset prices, not just for gold , but across the board. And now for the good news..Here's something positive to take away from this. I have been looking at the duration of bear and consolidation phases in gold since this bull market began. And this is a chart I'll be showing to all.........

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The red line marks the top of gold's channel. The blue dotted lines mark the consolidation periods from interim high to breakout to new high. The green dotted lines mark the period from the interim high to the low from which it sets off on its next run. The longest duration from high to low was in 2008. It lasted nine months. This bear phase has been about eight months. So we're in the timeframe for a low. Im willing to be patient. Gold remains attractive. Although it has had a less-than-stellar year so far...... Hang on to gold Consider what US financial newspaper Barrons.....recently said in its editorial ;When asked if they could imagine another Lehman Brothers-style event, most analysts responded: "It's just a matter of time. This financial system is completely unsustainable The ability of governments to sustain the unsustainable ultimately rests on their ability to maintain faith in their creditworthiness... If this devaluation of financial assets proceeds apace and the moment of clarity comes for many investors in the West who realise they need to diversify into assets that can protect against devaluation, demand for physical gold has the potential to rise dramatically." The beauty of gold is that it offers a chance to protect against both deflation and inflation. It's difficult to point to gold's credentials as a deflationary hedge because prior historic periods of deflation occurred when its price was fixed. The most recent deflationary period was limited to Japan, at a time when the rest of the world economy was booming. But as deflation (in financial asset terms) is associated with acute financial stress, it seems reasonable to expect gold to provide some diversifying relief from that stress. Particularly because (unlike sovereign debt, for example) it is nobody else's liability. And as an inflationary hedge, it is worth noting that gold has remained a store of value for literally

thousands of years. Gold is also now getting attention from the unlikeliest of sources. Bond fund manager Bill Gross of Pimco recently wrote: "As [investors] question the value of much of the $200 trillion which comprises our current [monetary] system, they move marginally elsewhere to real assets such as land, gold and tangible things, or to cash and a figurative mattress where at least their money is readily accessible." In short, investors are faced with a choice between vast abundance (in paper assets and all things debt-like), and genuine scarcity (tangible and real assets, especially gold). In a de-leveraging world and in light of the ongoing financial crisis, it makes sense to vote for scarcity

And theres a good reason I think you should own some gold. Ill show you why...last week was a big news day. The markets eagerly awaited news on interest rates and accommodative measures from a batch of central banks. In the end, nothing came well, not what the markets were hoping for anyway. No big QE announcement and no drop in base rates. Just a collective central bank battle cry along the lines of:We will do everything necessary to get these economies back on track. We will not baulk at our duty. We are preparing the big guns. Nuclear if need be...The battle lines are drawn In case you need a reminder, the battle lines are drawn between paper (you know, all the promises written down on bits of paper) and real things. I use the gold price as a barometer of which side is winning. And gold confirms were in the middle of the great grind. Golds gone practically nowhere all year. Its as if a ceasefire has been called. But now the paper debt generals tell us theyre about to break cover theyre just readying themselves. But there are different views from the central banks. In Europe, its a matter of diplomacy. The ECBs lieutenants are busy negotiating exactly what is legal in this war. How far can they go? The ECB has already shown a willingness to buy the bonds of its distressed allies. Now, they plan to give aid directly to embattled governments and their banks. Its just a matter of negotiating the terms with the northern allies. Germany in particular ?

For the US Fed, its a matter of timing. With presidential elections looming in November, the generals need to wait. But make no mistake, theyre preparing for war. And in this war, they fight fire with fire, or should I say paper with paper. That is, they plan to cure the economic ills (too much debt) with more of the same. Ben Bernanke is utterly convinced that this will work. The Feds statement said they "will provide additional accommodation as needed to promote a stronger economic recovery" so the only question is when? Their tactics are increasingly desperate....The likes of Ben Bernanke thought they had this battle won before it even started. Simply issue more paper and hey presto the battle is won.But heres the thing. They cant get the cash to flow round the economy. Sure, you can flood your chosen banks with cash. You can even tell them you want the new money lent out and into the economy. But telling a bank what to do is one thing getting them to do it is quite another. And anyway, the banks need the money now. Theyve got to reimburse the customers and to pay fines for malpractice on other things like Libor rigging. Money is not flowing as it should. Right across the globe, economies are stagnating. Governments, the public and corporations already have enough debt... theyre trying to pay it off, if anything. But of course, that wont stop the central planners. Convinced that they are fighting a just cause, and convinced of their state of the art weaponry, theyre still up for a fight. Given that the authorities have started down the road of money printing, I think its inevitable theyll continue with more of the same. Its impossible to know exactly how this pans out for your investments. Economics isnt science after all. Its not physics or maths there are no natural laws you can fall back on And this war is based on authorities dogma , that they can control economic growth with monetary policy. That means zero interest rates to drive new debt formation. And because that doesnt work, it means printing money to help create negative interest rates (where inflation outpaces returns on savings). The central banks are primed for the next assault. The Fed and the ECB acting in unison will be quite something to behold. To my mind, the scene is set for golds next run-up. The more paper the planners throw into battle, the higher gold tends to go... one could recall in more detail about the currency crisis in the Austro-Hungarian empire1919: the year another European currency union died. There are some interesting parallels between what happened then and whats happening now. The concern is that if Greece is finally forced out of the euro, the crisis will burn quicker and brighter than ever before. Like Austrian and Yugoslavian savers in 1918, there'll be a race to evacuate wealth from the periphery before it's too late. Indeed, money is already fleeing the area. Spain and Italy are the latest countries in the markets crosshairs and savers there are migrating to gold in a large way as we speak.......Hat-tip to moneymorning

shamikbhose@rediffmail.com...sbhose@microsec.in // www.slideshare.net & www.linkdein.com Here Comes $10,000 Gold...

Be prepared to hear more calls like this. "It has never been easy to have a rational conversation about the value of gold," wrote Ken Rogoff in a 2010 piece titled $10,000 Gold?.But with the national debt passing $16 trillion and the Federal Reserve launching a unlimited quantitative easing, the gold bulls will increasingly tell you that the sum of their fears are coming true. In this week's issue of Barron's, Jim McTague spoke to Guggenheim Partners Scott Minerd: Hedging against the most pessimistic case without crippling the upside potential of a better or even miraculous case appears to be as unsolvable as the proverbial Gordian knot. Alexander the Great "solved" the intellectually challenging knot riddle by severing it with his sword. Scott Minerd, chief investment officer of Guggenheim Partners, offers a more reasoned but equally simple solution to the hedging conundrum: gold. In extreme circumstanceslike miscalculations regarding inflation by the Federal Reservethe metal could hit $10,000 per troy ounce, he asserts. Thursday, after the Fed disclosed its latest financialstimulus scheme, the metal rose about 2% to $1,768. The ultra bullish forecasts for gold aren't without precedent. Applying the "Pareto principle" the idea is that 80 percent of the effects of something come from just 20 percent of the causes Erste Group analyst Ronald-Peter Stoeferle argued that we could see $8,300 gold by the spring of 2015. Citi's Tom Fitzpatrick also has an extremely bullish gold scenario out there. "We see no reason why this gold trend cannot perform as well as the last bull market in gold between 1970 and 1980," he told King World News. "If you replicated that move exactly, it will take gold to $6,300."Inflation and technical pattern aren't the only ways to get to extremely high values for gold. Richard Russell and QB Asset Management's Lee Quaintance and Paul Brodsky have proposed pegging the dollar to gold at $10,000 per ounce. Bottom line: expect more gold bulls to present their ultra bullish cases for gold..Frank Holmes the CEO and CIO of US Global Investors is one of the more vocal and articulate gold bulls out there. And his position is rather thoughtful. Holmes recently hosted a Hard Assets Investment Conference where he gave this monster gold presentation. Basically, he poses the question of whether you should be bullish or really bullish.A major element of Holmes' argument is growth in China, which he leads with in his presentation. What follows are 70+ charts that makes Holmes complete case. Excerpts from Barrons

All Signs Say To Buy Gold

With another syringe of quantitative easing being injected into the U.S. economys bloodstream, Ben Bernanke is giving the markets their liquidity fix. The Federal Reserves action reaffirmed my stance Ive reiterated on several occasions that the governments across developed markets have no fiscal discipline, opting for ultra-easy monetary policies to stimulate growth instead. The governments liquidity shot promptly boosted gold and gold stocks, as investors sought the protection of the precious metal as a real store of value. You can see below the strong correlation between the rising U.S. monetary base and growing gold value. Since the beginning of 1984, as money supply has risen, so has the price of gold.

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The dollar declined due to the Feds easing, which isnt surprising, given the fact that gold and the greenback are often inversely correlated, and increasing money supply generally causes the currency to fall in value. Whats interesting is that currency decline was what Richard Nixon sought to avoid when he ended the gold standard in 1971 and announced that the country would no longer redeem its currency in gold. During his televised speech to the American public, Nixon translated in simple terms the bugaboo of devaluation, saying, if you are among the overwhelming majority of Americans who buy American-made products in America, your dollar will be worth just as much tomorrow as it is today. As you can see below, more than 40 years later, a dollar is worth only 17 cents. This significant decline in purchasing power only strengthens the case of gold as a store of value, likely prompting Global Portfolio Strategist Don Coxe to propose making Nixon the patron saint of gold investors, during this years Denver Gold Forum.

As Milton Friedman once said, Only government can take perfectly good paper, cover it with perfectly good ink and make the combination worthless. In its long-term asset return research charting economic history in comparison to current markets, Deutsche Bank illustrates multiple ways how the world dramatically changed post-1971 relative to prior history. While the research firm makes it clear that returning to the gold standard would be disastrous, DB finds that the lethal cocktail of unparalleled levels of global debt and unparalleled global money printing are relatively new governmental developments. Prior to the last four decades, deficits only occurred in extreme situations of war or severe economic setbacks, such as the Great Depression. Balanced budgets were a routine peace time phenomena in sound economies. Since 1971, surpluses have been rare. The U.K. has had an annual budget deficit 51 out of the past 60 years and Spain has had 45 years of deficit spending over the past 49 years, according to DB.

Many developed countries are in a predicament, as fiscal austerity attempts have led to weaker-thanexpected growth in Greece, Ireland, Portugal, Spain and Italy. DB asks, Can we really be confident that the developed economies that we have created over the last 40 years have the ability to withstand the effects of austerity and cut backs? Do our modern day econometric models have the ability to understand

the impacts of fiscal retrenchment after a financial crisis having been calibrated in a period of excessive leverage? Countless discussions over fiscal and monetary policies will carry on, but time will tell. Ian McAvity, editor of Deliberations on World Markets, says, Excessive debt creates deflationary drag that they repeatedly fight by throwing fresh liquidity or stimulus at, to debauch the currency of that debt For private investors, gold is the best medium for self-protection and preservation of purchasing power in my view. I agree. Rising money supply, declining purchasing power and annual deficits are giving the all-clear to include gold in your portfolio. Many others appear to agree with us, as sentiment has shifted in favor of the metal in recent days: According to Morgan Stanleys survey of 140 institutional investors in the U.S., gold sentiment was at its highest bullish reading since July 2011 and the largest month-over-month increase during the surveys three-year history! So, gold investors, if you havent put in your orders, consider getting them in quickly, because the bulls are buying. Credit Suisse saw massive inflows into gold exchange-traded products in August after experiencing significant outflows compared to crude oil and the broader market in March, April, May and July. August shows a clear preference toward gold.

We generated lots of interest when we showed our standard deviation chart a few weeks ago, so I updated it through September 13. Although gold has been on a tear recently, breaking through the stumbling block of $1,600 and climbing to $1,770 by Friday, bullion still looks attractive, with a low sigma reading of -1.7.

A look at a histogram shows how many times gold bullion historically fell in this sigma range. Todays sigma of -1.7 has occurred only about 2 percent of the time. Bernanke and Draghi only made the decision more obvious for gold and gold stock buyers.

The Fed and ECB also make my job presenting at the Hard Assets conference in Chicago very exciting.

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Related: When You Should Stop Buying Gold

First Mover Advantage

Frank Holmes is the CEO and chief investment officer for U.S. Global Investors

In the Investor Alert, our investment team shares charts and data that we believe provide readers with a first mover advantage. While markets dont always move like we anticipate, recognizing historical trends can provide an edge if you act quickly.Last week, gold bugs were rewarded with the long-awaited positive momentum in the yellow metal, and on Friday, bullion rose to about $1,670. After falling below the 200-day moving average, gold had been stuck in quicksand for several months. With the jumps in the price last week, bullion swiftly rose above this critically important long-term moving average. Bloomberg reported on Thursday that gold investors were the most bullish in nine months as its survey of 29 of 35 analysts indicated that they expected prices to riseonly three were bearish toward the metal. One chart that might turn those three bears to gold bulls was featured in a recent Investor Alert. I noted that golds 12-month rolling return in standard deviation terms triggered an extremely low sigma event, dipping below a reading of -2. To our investment team, this signal means that investors should expect gold to experience a significant price reversal.

Price reversals, of course, work both waysthe oscillator above also tells you whether gold has climbed too quickly and should be expected to fall. If you take a look at the previous peak, when gold rose above 2 sigma, the chart sent out a chilling warning signal that gold was due for an eventual correction. Last August, when the price of gold was reaching all-time highs, I reminded investors that it would be a non-event to see gold decrease by 10 percent. In fact, I felt that this correction would be a healthy development for markets, because it would act to remove the short-term speculators while the longterm story remained on solid ground. Gold still hasnt made it back to its all-time high, but Stifel Nicolaus gold-to-crude oil ratio suggests gold climbing to $1,900. According to Stifels research, the gold-to-oil ratio based on the price of Brent has historically shown a tendency to run to around 16.5x. In other words, the price of the yellow metal is usually about 16.5 times the price of a barrel of Brent oil. With Brent trading around $116 per barrel last week, the math tells us that gold could go to $1,900.

The long-term fundamentals for gold stand on solid ground. Way back in March, Ian McAvity stated that the extreme behavior of major central bankers and the absurd risk-on/risk-off surges of liquidity across all markets fueled by those liquidity injections sloshing around markets rather than reaching any economy is frightening, and the most bullish fuel they could throw at the gold market. Liquidity keeps flowing today, as central banks have continued their massive global easing cycle throughout the summer. In McAvitys opinion, The gold price volatility is more a reflection on the U.S. dollar and euro paper and the madness of an asset bubble. Gold will be the last man standing on the other side of the valley. Even the Love Tradegold buying out of China and Indiaisnt over, despite rather tepid quarter-end results from the World Gold Council. In his latest Greed & Fear document, Christopher Wood from CLSA says that he believes the media overreacted to Chinas gold demand. With gold demand totaling nearly 800 tons from June 2011 to June 2012, he points out that the country is still buying a lot of gold. As for gold demand in India, his team hears that people are buying gold with cash to avoid the higher duties. As a result, these cash purchases will not be recorded in the official data, says Wood. In addition to these factors, theres a new growing demand coming from central banks. Wood sums it up for investors: The conclusion for investors is stupefyingly simple. Stay long gold.
Excerpts from Microsec Reports

Musings this month.Gold and Silver Gold was directionless yesterday, showing a small loss that can only be accounted as profit taking, since gold climbed last week from 1685 to 1740 on the back of the non farm payroll report and the hopes of Fed stimulus. At this time gold is trading at 1730.65.The ongoing hype over the expectations of another QE3 to be announced by the FOMC in the near future (the next FOMC meeting will be held on September 12th and 13th) make us think about the relation between the speculations of another Quantitative Easing in the U.S and the changes in the price of gold. The chart below shows the

developm ments of the weekly search volume for the term Q w r QE3 between 2011 and 2012. It also s n shows progress o the price of gold throug of o ghout those y years.

As seen a above, the peak of the se earch volume was back in August 2011 when the U.S was fac e e cing a problem i raising the debt ceiling and was dow in wngraded by a rating agen from AAA to AA+. In r ncy A recent weeks the hype over another QE p e program is also noted in t chart, even though it not at the same the s high volum as it was back in Augu 2011. The chart also sh mes s ust hows a strong relation betw g ween gold an the nd search vo olume for the QE3. Furthe the linear correlation between the (lagged by one week) search e er, r e volume fo the term Q or QE3 and gold percent cha d anges is 0.33. This is a mid-strong corre elation. Gold Posit tion COMEX & ETF COM net specu X MEX ulative length rose for a third consecutive week, alth hough with sligh less confidence (56.6 tones, com htly 6 mpared to th 86.8 tone and 70.4 tones of the two he es e preceding weeks). Ob g bviously, Bern nankes rema arks at Jackso Hole (31 August) were enough to keep on e hopes of further quan ntitative easing alive. The change in t net posit e the tion was onc again drive by ce en f nwinding of s short position (12.6 tone was simila to the pre ns es) ar evious moves of a bullish nature. The un week. A s strong additio to longs (4 on 44.0 tones) was also evident, although it was notice eably lower th in han the previo week. ous ETFs cont tinued to stea adily build up their gold ho oldings (14.6 t tones), no do oubt embolde ened by the w worsethen-expe ected US payrolls numbe which has increased expectations of some form of QE being er s announce at this we ed eeks FOMC m meeting. So f holdings have grown 83.4 tones over six wee of far, eks uninterru upted gains, bringing total holdings to a record leve of 2,557.4 t b l el tones. shamikbh hose@rediffm mail.com...sbhose@microsec.in // ww ww.slideshare.net & www w.linkdein.com

Silver Position COMEX & ETF COMEX Silver again saw a strong increase in net speculative length, with 712.1 tones added. Although the gain was fairly strong, it was only just above half the record-gain seen in the previous week (1,391.1 tones). ETFs, however, appear to being growing nervous. The week saw a hefty 85.2 tones removed from their silver holdings, marking the first decline in eight weeks. Silver is the only precious metal were a decline in ETF holdings was observed.

Physical demand when spot Gold above $1,700 At this point of time we are trying consider the effect of golds rally above $1,650 on physical demand. To gauge this effect, we turned to Gold Physical Flow Index (GFPI) which tracks the net buying/selling of physical gold a positive (negative) number indicates net buying (selling). As expected, when prices started their ascent (from around 14 August), buying of physical gold began to dissipate, which saw our GFPI move lower on a daily basis, and on a weekly basis considerably below last years level. This obviously placed a cap on the price increases spurred on by investor interest. Once again gold has rallied, but this time looking at o GFPI it appears as though physical demand has remained relatively robust, albeit at levels below that seen in 2011. The physical market continues to be well supported by the Far East, although Indian buying has also returned and remained fairly steady, even after last weeks push above $1,700. Two factors appear to be at play here. First, as we have seen in the past, after an initial slowdown in buying after a price rise, the physical market adjusts to the higher level and resumes buying. However, it must be noted that this time the adjustment appears to have been fairly rapid. This brings us to the second factor. This adjustment has been further facilitated by the need for physical gold as we enter the festive and wedding season.

Change in Gold and Silver on FOMC decision The prices gold and silver resumed their upward trend soon after the FOMC announced of QE3 that will consist of purchasing additional agency mortgage-backed securities at a rate of $40 billion per month. This news is likely to continue affecting precious metals rates during the day. In other news U.S PPI rose by 1.7% during last month. U.S jobless claims rose by 15k to reach 382k. These news items may have curbed a bit the rally of bullion but the effect of the FOMC decision eclipsed all other news items. On Thursday, Gold hiked by 2.21% to $1,772; Silver also rose by 4.46% to $34.78. During September, gold increased by 5.01%; silver, by 10.61%.Yesterday, gold opened slightly higher and traded within a narrow range as investors took position before Mr. Bernankes announcement. The bounce upward to an intraday high of $1772 was reached after the fed promised to stimulate the economy with monthly MBS purchase. Silver also experienced a volatile trading day, opened at $33.28 and made a low of $32.63, but renewed stimulus measure taken by Fed, saw the metal strengthen dramatically and reached an intra day high of $34.81. The table below shows the reaction of bullion rates following the FOMC meetings. The last time there was such a strong and positive reaction was back in January when the Fed had pledged to keep rates low until late 2014. This also suggests, assuming all things equal, that bullion rates will continue to rise during the day.

Focus: QE3 top commodities pick The decision by the Fed to buy USD40bn MBS per month until labor market conditions are to the Feds liking, could amount to considerable QE. The Fed also pushed back its rate hike guidance until mid-

2015. If the Fed were to buy MBS up to that point, at a rate of USD40bn per month, it would add up to USD1.3tr. We believe this statement and the press conference saw the Fed is keen to show that theres more it can and will do if necessary. We think that this will continue to push the dollar lower with euro/dollar headed into a 1.30-1.35 range and help riskier assets, like commodities. What does this imply for commodities? We have little doubt that most commodities will rally in fact they have rallied already. The question is: which commodities are likely to rally more than others? We pick gold, silver, Brent and aluminum. We look at the relationship between the Feds balance sheet and commodity prices over two periods (1) since 25 Nov 2008 and now (the period since the Fed first announced they would buy agency-backed mortgages) and (2) 4 Nov 2010 until June 2011 (six months following the announcement of QE2. These two periods allow us to gauge the longerterm effect (which may be distorted by commodity specific factors). The shorter period following QE2 is likely to be less influenced by commodity specific factors. Therefore, looking purely at QE, we put more weight on the commodity price movements following the announcement of QE2. We also look at the period following QE2 rather than QE1, as liquidity was a major issue in the months following QE1 something which was not as prevalent after QE2 and now. In interpreting the data, we look at the beta between the Feds balance sheet and the commodity but also how much variation of the commodity price movement is explained by the Feds balance sheet. This provides us with some indication of how commodity prices may react but also how certain we can be about the possible price reaction. Given that QE is initially purely a monetary phenomenon with a possible real economic effect only later, we note that price reaction may differ from what one would expect, looking purely at commodity specific fundamentals.

Focus: Room for Gold to move up butSilver is little bit stretched. Net speculative length for COMEX gold rose for a fourth consecutive week (61.7 tonnes). The change in the net position was again driven by bullish moves; an unwinding of short positions (14.0 tonnes), and a strong addition to longs (47.7 tonnes). There is little doubt that these moves were as a result of raised expectations of Fed quantitative easing after the worse-thanexpected US payrolls number. As it turns out, these expectations were well-founded. Looking at previous post-QE announcement periods, we

could see a pull-back in net speculative length next week, a e i although upw ward moment tum should r return and rema in place fo some time. In addition, given that ne speculative length as a ain or et e percentag of open in ge nterest, at 26 6.7%, is not p particularly high, there is s room for increased le still r ength. Unsurpris singly, ETFs pi into gold, adding 30.5 tonnes to th holdings the strongest increase o the iled heir of year so fa Given the announceme of QE3, g ar. ent gold is one of our top picks i.e. like to move h f ely higher with the most certainty or highe confidenc Again CO est ce OMEX silver saw a strong increase in net n speculativ length, alt ve though at only 169.0 tonn (compare to the 712 tonnes and 1,391.1 to nes ed 2.0 onnes added in the precedin two week enthusias did seem to be waver ng ks), sm ring. Howeve some fatig is er, gue ndable, as this also marked the seventh consecutive week of fairl large gains. Unlike the d h e ly understan previous w week, the ne change was driven by a strong unwinding of spe et eculative shor (179.6 ton rts nnes). Surprising 10.6 tonn were unw gly, nes wound from lo ongs although only a sm decrease this did end four mall e, d successive weeks of ga e ains.

After seve weeks of gains, net spe en g eculative leng is now at 5,842.3 tonnes a 12-m gth t month record high d and well a above the 5-y average of 4,868.5 tonn Worryingly, net spec yr f nes. culative lengt as a percentage th of open i interest (21.7 is showing signs of a market tha is becomin overstretc 7%) at ng ched. Perhap this ps explains t caution among futures market par the rticipants. ETF however, r Fs remained dec cidedly nthus siastic (the ETF d data which is for the wee ended 14 S s ek September, d does reflect t certainty of QE3 unlik the the ke FTC data), adding 231.9 tonnes to s , silver holdings s. I have ne ever been hurt by wha I have not said. Calv Coolidge h at t vin e

Shamik B Bhose Execu utive Directo Commodity & Curren & Intere rate futu or ncy est ures Markets s

Microsec Commerze Limited Www.microsec.in ; www.commoditylive.in Phones 009133-30512100 /

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