Dear CIGAs,

The sinking crude oil market continues to undercut any strength in gold as it feeds into the deflation psychology which is not the least bit helpful to a higher gold price. As long as crude oil continues to move lower, gold will struggle as momentum based funds will move back out of the gold market while shorter term oriented hedgies will press the short side, nipping any rallies in the bud. If you notice on an intraday chart, as crude oil moved off its worst levels of the day, gold came back in force as did both the HUI and the XAU.

Technically gold is still stuck in a very broad consolidation pattern with a current bias towards weakness as it moves down to test the lower region of that nearly 5 month long range. Markets in consolidation modes no longer attract the attention of the movement chasing funds whereas they were once viewed as opportunities for long term players to build a large position size in anticipation of the eventual resolving of the pattern in one direction or the other. Nowadays, if it ain’t movin’, they go and find some newer and more exciting playground somewhere else. Gotta have the Mortal Kombat action or they get bored.

I am not sure what it is going to take to fire up some upside excitement in gold but seasonally summer is not a particularly strong month for the metal so as long as it can continue to attract buying as it nears the bottom of the broad price range that has contained it for this year, that should be considered friendly. We are going to need to see gold manage a close above $940 to at least push a few shorts out of the market. Much stronger resistance remains near the $960 level.

Until this deflation/inflation battle resolves itself, the markets will remain the domain of the one minute bar chart geeks and commenting on their price action is pretty much a day to day event with only the naïve suggesting than any one day’s price action is indicative of a new price trend. I really do not see anything beginning a solid trending move until the US Dollar begins a sustained trend downward.

I want to echo Jim’s comments on the hyperinflation front – it is the loss of confidence in a currency that results in a runaway in prices. Looking back throughout history, who is to say with pinpoint accuracy that it was this event or that event that was the exact cause of such an occurrence? Rather it was the culmination of a series of events that developed out of national monetary and/or fiscal policies, coupled with unexpected geopolitical events that led to the loss of confidence in a currency. Some random event then was the final straw that broke the proverbial camel’s back and created the final event.

I maintain that such will be the case with the US Dollar. The seeds for the loss of its place of supremacy among the nations of the earth have been planted and are now being quite effectively nurtured by the present policies of this nation. As long as confidence, that ethereal, vapor-like substance, can be maintained, hyperinflation will not occur. But once confidence is lost in a currency that has no backing other than the “full faith and credit of the government”, from whence does it draw its support in the minds of the people? What happens when a sufficient majority lose their trust or faith in the government’s ability to manage a crisis? Think it cannot happen here? Guess again! How many of you out there ever believed you would live long enough to see the state of California run completely out of money and issue IOU’s with which to pay its creditors? Does anyone who is reading this believe that the majority of the citizens in that state have any confidence or “trust” left in the political leaders of that state? If California were in the business of issuing a currency, I assure you that such a currency would now be in the scrap heap along with the rest of the contents of the dumpsters that can be found in that state. The only reason anyone is even accepting those IOU’s is because they believe that the feds are eventually going to bail them out.

What happens when the next state goes belly up and begins issuing its IOU’s? and the next, and then another? When does it stop? When you really sit down and think about it, our federal government is doing nothing different than the state of California – it is issuing IOU’s (excuse me – these go by the fancy name of US Treasury obligations). So what would happen in the event that the rest of the world, or the US citizens themselves, reach a point where they lose confidence in the ability of their political leaders to do the right thing and form the correct policies? Answer – a crisis of CONFIDENCE in the national currency. That is what contains the makings of a hyperinflationary event. It really is that simple. Once confidence is lost it cannot be regained without great changes occurring. In some cases, it can NEVER be regained. But one thing is as sure as the sun rising in the morning – people who hold that particular currency will begin to frantically look for something, anything, that they can find to purchase with that currency in order to get rid of it and obtain something of perceived value. That then feeds on itself and as more confidence is lost and further fear takes hold, human nature then moves into the panic phase in which rational thought disappears.

I surely do hope that for the sake of our nation and more importantly, for the sake of our children, that from some quarter, true statesmen will arise who will rightly discern the problem and take the drastic and necessary steps needed to right the ship of state and provide some sort of stability out of which normalcy can return. Only time will tell whether that will occur.

In the meantime, now you know why the present Administration and the monetary authorities have embarked upon what Jim refers to as MOPE. They know how elusive a thing this “confidence” is and they FEAR losing it and will do ANYTHING, and I do mean ANYTHING, in an attempt to preserve it.