Thread: Two Important Messages from the Fear Index -

Jan 22 2010 9:41AM

Two Important Messages from the Fear Index

The Fear Index remains within its decade-long bullish uptrend, so we therefore know as a consequence that gold also remains within an uptrend. But the Fear Index is also giving us another important message. It is that gold remains undervalued.

Gold’s valuation is indispensable information given its exceptional appreciation this decade. In other words, even though gold has risen nine years in a row http://goldmoney.com/commentary-gold-sh ... -year.html against the US dollar, it remains relatively cheap.

This conclusion is illustrated with the following chart.



The dashed horizontal line on this chart marks 2.63%, which is the average value of the Fear Index since August 1971. That is the date when President Nixon – with total disregard to the US dollar’s 180-year history – turned the dollar into irredeemable fiat currency, in effect declaring by presidential edict that the monetary requirements of the Constitution were null and void.

The Fear Index is presently 2.05%. Note that it is lower today than August 1976 when the Fear Index was 2.28% and gold was $104. Therefore, gold at $1106 – its December 31, 2009 price – is even more undervalued than it was at $100 back in 1976. How is that possible? How can gold be more than 10-times more ‘expensive’ today and still be better value?

Simple. A 2010-dollar is not the same as a 1976-dollar. The dollar’s name has not changed, but the dollar has been terribly debased over the past 34 years. It has lost much of its moneyness – its innate value as money – in two insidious ways.

It has lost purchasing power because of inflation. Secondly, it also has 0.23% less gold-backing today than it did at the low point of the Fear Index in 1976. Even though dollars can no longer be redeemed for gold, dollars are still partially backed by gold. The Fear Index measures to what extent gold backs the dollar, assuming of course that the 261.5 million ounces in the US Gold Reserve really exist and have not been loaned out, encumbered or put in play http://www.fgmr.com/us-gold-reserve-now-in-play.html as part of the gold price suppression scheme http://www.gata.org/node/8052 led by the US government.

What is clear from the above chart is that one cannot use the dollar price of gold to determine whether or not gold is good value. The purchasing power of the dollar and the extent of its gold-backing are ever-changing. So the dollar is not a good measuring stick. It is not a numéraire.

The important conclusion from the above chart is that gold remains relatively cheap. We should therefore continue to accumulate it.

For reference, the formula to compute the Fear Index is:



The value for the Fear Index as of December 31, 2009 is calculated as follows:



Click here to download the historical data for the Fear Index http://www.fgmr.com/file/Fear_Index_mon ... c_2009.xls.

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The Moment of Revelation is Approaching

By John Cassimatis
Jan 18 2010 2:47PM
www.kitco.com

After churning in a typical mid-January holding pattern, tightly range bound, gold and silver seem poised to break out to the upside. I continue to expect that the wave beginning with gold’s Deccember 1075 bottom should peak around the very end of January, or very early February. That only gives us approximately 10 trading days left so it would make sense that gold get’s its engine running by the middle of this week at the latest. I am prepared to buy more on a break of 1145-1152 depending on how gold’s downtrend moves extend. I am speaking of gold’s recent downtrend line from 1163 and it’s bigger one from 1225. Currently, it seems as though a break of 1152 would clear both. As those of you that regularly read me know, these diagonal lines are of the most importance. They typically provide the signal, the entry point when risk and momentum seem to favor the buyer.

Other factors leading to this call include the current RSI. By pulling back from 1163 last week, the RSI was able to avoid going into overbought levels, and its pattern is now consistent with longer, more deliberate, steady advances. Again, a strong two-week drive from here would most likely put it in sell territory. More than the RSI, however, was this week’s COT report. Many months ago, I wrote that we would probably not get Total Speculator long contracts back to traditional buy levels anytime soon, and that remains the case. I even argued that we would not see Net Speculative long contracts approach any sort of magical level of the past. Investment demand, as we all know, has been rising steadily, and continues to serve as a major factor behind this drive. The major COT clue I believed we might see again was in the Total Non-Commercial Short category. In the past, 50,000 Speculator short contracts ushered in a gold market that was prone to spikes following selloffs—an almost frustratingly inability for gold to go and STAY down. This week’s report showed such short positions climbing to 43,000, a jump of over 6,500 contracts. While this level is not quite 50,000 it should lend some support to the market. The surge, in my opinion, represents an incorrect bet by certain funds that do not truly understand gold and its dynamics. This bet, fine, I will just say it, is premature. Notoriously quick to cover, I believe it will be those short funds precisely that initiate gold’s assent during the final two-weeks of January. Once the covering runs its course, RSI’s climb, money gets posted, risk grows, distance from 1000 increases, and January ticks towards an end, I may very well join the remain few that are short. But for now, I consider the bet premature. The fun part is that the market will tell us who is right this week.

In general, I like the action here. I can readily admit that I thought the range we settled into was going to be one-rung higher, namely 1145-1175 gold. I was wrong on that, but a range we did find. The action is highly reminiscent of gold’s first, its premier, breakout drive of significance. To my semi photographic/phonographic memory, the parallels are intriguing. So much so, that I cannot help but bet on their continued rhythm. If I go down, it will be on gold’s first aberration from a tightly followed script. I can handle that—though clearly my bets that we are in Act 2 of a 3 Act play.

As for silver, it is simply impressive. Having been called Long John Silver by my friends for 8 years now, this is not the time to give up on this bet. I have never witnessed such a lack of volatility during down moves as now. Gold is the one that seems to be flipping and flopping unsteadily in comparison to its “kissing cousinâ€

Financial Elite's Behaviour Has Opened Floodgates for Gold

By Lorimer Wilson
Jan 19 2010 2:40PM
www.FinancialArticleSummariesToday.com

In spite of philosophical differences in many areas of politics and economics, Ron Paul and Simon Johnson agree that the cosiness that exists between the U. S. Congress and the financial elite has not worked, and is not working, in the best interest of the average American. They both suggest that major changes must be made in that relationship to strengthen the American economy. Is it too late, however, to avoid the repercussions of an even weaker greenback, rising inflation and the opening of the floodgates in the price of all investments related to gold and silver?

"When Treasury Secretary Tim Geithner was Chairman of the New York Federal Reserve, he urged AIG officials not to disclose to the Securities Exchange Commission relevant details of agreements with banks to bail out Goldman Sachs. Apparently he felt at the time that regulators and the public would be angry that taxpayer money was used to fully compensate bankers who made some horrifically bad investment decisions. These banks should have suffered the consequences of the huge risks they were taking. After all, they kept plenty of rewards when times were good. Instead, the Fed found a way to socialize these major losses so these banks could survive and continue making more bad decisions, at the expense of the American people and the value of the dollar." So says Dr. Ron Paul in a recent article entitled 'Why the Fed Likes Independence'.

Paul's comments are a perfect follow-up to earlier comments by Simon Johnson in his article entitled "The Quiet Coup" in which he said that the finance industry had effectively captured our government going on to say:

Financial Oligarchy Remains Unchallenged

"America is in financial crisis but instead of the financial oligarchy being broken up to permit essential reform they are continuing to use their influence to prevent precisely the sorts of reforms that are needed. Unfortunately, our legislators seem unwilling to act against these powerful financiers opting instead to succumb to their power and influence and continue to give them what they deem to be in their best interest instead of that of the taxpayers’.

All this is happening because of the false belief by all concerned that large financial institutions and free-flowing capital markets are crucial to America’s position in the world and that whatever the banks say is true, and what they want is necessary. The government’s velvet-glove approach with the banks is deeply troubling, for one simple reason: it is inadequate to change the behavior of a financial sector accustomed to doing business on its own terms, at a time when that behavior must change. There is no better time to take such action than now but it is evident that reform is but a pipe dream. America’s financial oligarchy is still in control and, as such, the long-term consequences will be dire!"

Powerful Elite Protecting Their Own

Paul reports that "Geithner claims he had to take such politically unpopular actions to save the economy from collapse. Half of that is right - it was politically unpopular, but it is extremely premature at best, to claim the economy has been saved...It is hard to argue that this sort of government waste has done anything but harm to our economy. Raiding Main Street to bail out Wall Street is a foolish idea."

Johnson goes further saying that "typically countries in crisis are in a desperate economic situation for one simple reason—the powerful elites within them overreached in good times and took too many risks. That certainly is the case with the powerful elites - the financial oligarchy - in America...they (the American financial industry) gained political power over the years by amassing a kind of cultural capital, a belief system in which Washington insiders believe that large financial institutions and free-flowing capital markets are crucial to America’s position in the world … and always and utterly convinced that whatever the banks said was true."

Lack of Transparency Troubling

Paul makes the point that Geithner's revelation shows the need for Fed transparency and that "their claim that they should have "independence" is a canard. They very much enjoy their comfortable pattern of bailing out friends and devaluing the currency with no oversight and no accountability. Geithner specifically asked officials at AIG not to disclose to the SEC or to the public particulars about this special deal for his friends. We only know these details now because AIG was eventually forthcoming when Congress demanded some answers."

Paul's views only confirm Johnson's who put forth that "When the crisis first began the government was slow to react and then did so with a lack of transparency, and an unwillingness to upset the financial sector. The response so far is perhaps best described as “policy by dealâ€