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The following excerpts from TSI commentaries should give those who are unfamiliar with our service a taste of the sort of financial-world analysis provided on a twice-per-week basis to our paying subscribers. Note that during a typical week our subscribers receive two market reports, with each report generally containing 2500-3500 words and 7-12 charts.

This page will usually be updated every Tuesday with one or more excerpts from recent commentaries.

Date posted as sample	Commentary Excerpt
30-Aug-10	From the 25th August 2010 Interim Update: *The Bond Blow-Off* Treasury Bond futures continued their rapid ascent during the first half of this week, and at Wednesday's intra-day peak had become extremely extended to the upside relative to their 200-day moving average. In fact, the following chart shows that December-2008 was the only occasion over the past 20 years when the T-Bond was significantly more extended, relative to its 200-day moving average, than it is right now (the chart shows a 13% envelope around the 200-day moving average). There is a chance that the upside blow-off will continue for another 1-2 weeks, but in our opinion the short-term downside risk is now much greater than any remaining upside potential -- even taking into account the likelihood of a lot more bad economic news over the next two months. We are therefore downgrading our short-term T-Bond outlook from "neutral" to "bearish".
30-Aug-10	Also from the 25th August 2010 Interim Update: The US stock market in gold terms The SPX/gold ratio (the S&P500 Index measured in terms of gold ounces) made intermediate-term lows in 2003, 2006 and 2008. After each of these lows there was a sharp bounce and then a period during which the ratio oscillated within a horizontal range. In each case, a downside breakout from the horizontal range led to a substantial decline of around 6 months to the next intermediate-term low. The price action following the March-2009 intermediate-term low has traced out a similar pattern to the price action that followed the previous lows. In particular, after the March-2009 low there was a sharp bounce and then a period of horizontal range trading. SPX/gold now appears to be breaking out of its horizontal range, so if the similarities continue then a substantial decline will unfold over the next 6 months.
24-Aug-10	From the 23rd August 2010 Weekly Update: Gold Stocks The HUI traded with the broad stock market on Friday, initially losing a significant amount of ground but later recouping the bulk of its losses. Friday's downward spike suggests that support at 460 is significant. 460 is the top of a multi-day consolidation that occurred earlier this month and is within a point of the 50-day moving average. A solid daily close below 460 could therefore be taken as a bearish early warning signal. Looking at the situation from a slightly different angle, if there is going to be a sizeable decline over the next several weeks then the HUI should break below 460 within the next few days. In other words, our favoured short-term scenario (a decline to an October-November correction low) will have to get some confirmation this week. We aren't yet seeing broad-based speculation within the ranks of the gold/silver juniors, but some juniors have been doing extremely well of late and greatly out-performing their senior counterparts. Also, it is fair to say that the junior end of the sector has recently been stronger than the senior end. We don't think it is right to conclude that the juniors are leading the way higher. As far as we can tell, the juniors never lead. We think it's a case of the junior end of the market being completely washed out (almost all the weak hands are long gone), such that the incremental buying prompted by good news is not being met with any meaningful increase in selling pressure. Consequently, for the first time in a long time the stock prices of gold/silver juniors are responding very positively to good news, especially good news on the drilling front.
16-Aug-10	From the 11th August 2010 Interim Update: Inflation Expectations The following chart from www.fullermoney.com shows the difference between the yield on the standard 10-year T-Note minus the yield on the 10-year TIPS (Treasury Inflation Protected Security). We often refer to this yield difference as the "Expected CPI" because it reflects the credit market's expectation of what the CPI will be in the future. We don't think the absolute level of the Expected CPI is relevant or useful, but its trend appears to be a good indication of what's happening to inflation expectations. So, the chart tells us that inflation expectations collapsed during 2008, rebounded strongly during 2009, and have been falling since April of this year. Under the current monetary system, inflation expectations often trend in the opposite direction to monetary inflation. In particular, sharp declines in inflation expectations, such as those of 2008 and 2001-2002 (not shown on the chart), tend to be accompanied by sharp increases in the rate of money-supply growth. This happens because the Fed reacts to falling inflation expectations (rising fear of deflation) by opening the monetary floodgates. With the US economic data currently weak and likely to get weaker over the next few months, and with inflation expectations already in a short-term downward trend, it won't take much to create another deflation scare in the near future. In fact, there are already many articles appearing in the mainstream press -- the one discussed above, for example -- that talk-up the supposed risk of deflation. Like its predecessors, the next deflation scare will most likely result in another surge in the rate of monetary inflation, setting the scene for the stock market's next intermediate-term advance and the next multi-hundred-dollar rise in the gold price.
09-Aug-10	From the 9th August 2010 Weekly Update: Gold Stocks Current Market Situation In last week's Interim Update we noted that the XAU had closed Wednesday's trading session at its 50-day moving average, and that the preceding two rebounds had ended shortly after reaching this moving average. The following chart shows that by moving sideways on Thursday and rallying on Friday the XAU has managed to break above its 50-day moving average and rise to lateral resistance at 177.5. Although the break above the moving average is a minor sign of strength, the price action in both the gold bullion market and the gold mining sector of the stock market continues to look very much like the counter-trend-rebound variety. In particular, we note that gold and the gold-stock indices have recently strung together a lot of up-days, but that the overall upside progress has not been substantial and gold bullion has yet to even test lateral resistance at $1220. We therefore view the recent strength as another opportunity to build up cash or do some hedging, as opposed to evidence that a correction low is in place. Friday's intra-day high in the XAU was within 7% of its May high. Realistically, if the XAU continues to move upward from here it will take a decisive close above the May high to convince us that a new intermediate-term advance has begun. A more likely outcome involves a downward reversal within the next few days followed by a multi-week decline to a correction low in the vicinity of the February low (150 for the XAU, 370 for the HUI).
03-Aug-10	From the 26th July 2010 Weekly Update: *Is gold really worth $54,000 per ounce?* The gold-market-manipulation devotees occasionally discover something that adds to the overall understanding of the gold market, but more often than not they 'shoot themselves in the foot' by making claims and publishing analyses that can best be described as silly. The storm over "tungsten gold bars" is one example of the silliness we are referring to, but perhaps the best example to date is Adrian Douglas's latest effort to prove that the gold price has been suppressed. In his article posted HERE, Mr. Douglas claims that his calculation of a "true" value of $54000/ounce for gold is irrefutable evidence of price suppression on a grand scale given that gold is currently trading at 'only' $1200/ounce. However, his calculated "true" value is based on wrong (absurd, actually) assumptions and horribly flawed reasoning. If you attempt to solve a mathematical equation and arrive at an answer that would only make sense in a world where 2 plus 2 equals 97, then you know you've gone way off track somewhere along the way. By the same token, we can quickly determine whether a calculated gold price is plausible by comparing it with the prices of other commodities and investments. If our calculated price is totally 'out of whack' with all other prices then we should conclude that it is probably wrong, and re-check our premises and logic. In checking whether the aforementioned $54000/ounce figure meshes with reality, a good place to start is the price of gold relative to the prices of other commodities; that is, a good place to start is the gold/CRB ratio. The gold/CRB ratio is currently not far below its 1980 high, which, in turn, was its highest price of the past 130 years (perhaps its highest price ever, but our data only goes back 130 years). This means that if gold were now priced at $54000/ounce it would be about 4000% higher, relative to other commodities, than its highest level of the past 130 years. Next, we can check what a $54000 gold price would imply for the Dow/gold ratio. A long-term chart reveals that over the past 130 years the median Dow/gold ratio is around 8, which implies that if gold were really worth $54000 then 400,000 would be an appropriate level for the Dow at this time. All else being equal, for the Dow to trade at 400,000 its P/E ratio would have to be around 800. (As an aside, markets tend to move from one valuation extreme to the other, so we suspect that the Dow/gold ratio will decline to around 1 before the long-term equity bear market ends.) It actually doesn't matter which prices we use in our comparison. For example, if all else were the same and the gold price were $54000/ounce then gold would now be literally thousands of percent more expensive relative to houses and average hourly earnings than it has been at any time over the past century. A $54000/ounce estimate for gold's true value today is even more out of line with reality than the famous "Dow 36000"* estimate of 1999. Clearly, Adrian Douglas (AD) has made some basic errors, a few of which we'll now discuss. First, AD assumes that M3 represents the total supply of US dollars. This is not so, because M3 contains credit instruments in addition to money. The broadest measure of the actual US money supply is True Money Supply (TMS), which is presently about half the size of M3. Unfortunately, this is the most trivial of AD's errors. Of far greater importance is AD's assumption that all the dollars in existence are backed by, and only backed by, the US Treasury's gold. He makes the point that the "backing" of the US dollar with gold doesn't require convertibility, just as the backing of Exxon Mobil's (XOM's) shares by its oil assets doesn't allow an XOM shareholder to convert their shares into barrels of oil. This is a bad analogy, however, because the ownership of XOM shares creates partial ownership of the company's assets (if you own X% of a company's shares then you have X% ownership of the underlying business), but the ownership of US dollars does not confer any ownership stake whatsoever in the US Treasury's gold. Of relevance to the issue of 'dollar backing' is that most of the US dollars in existence today were created by bank lending. For example, when Fred Smith takes out a $500K mortgage loan to purchase a house, the bank deposits $500K of newly-created money into Fred's account (the total money supply is thus increased by $500K). The $500K deposit becomes a liability of the bank and the mortgage becomes an asset of the bank, so if these new dollars were backed by anything it would be the mortgage on Fred's house. However, the holders of dollars do not have any ownership of Fred's mortgage or of any other "assets" that went onto the balance sheet of any bank as an offset to the creation of new dollars. Even the 880 billion paper dollars in circulation confer no ownership of US gold reserves and are therefore not backed in any way by gold. The monetary system simply doesn't work that way. What, then, backs the US$? The answer is that the US$ (and every other fiat currency) is backed by the guns of the government. To be more specific, the US dollar's value is underpinned by its usefulness as money within the US economy, which stems from legal tender laws and the US government's power to tax. Due to legal tender laws, people in the US are forced to accept the dollar in payment for goods, services, assets and debts. And due to the government's insistence that it has the right to tax its citizens and that all taxes must be paid in dollars, there is widespread and substantial demand for dollars related to taxation. Even people who have no confidence in any fiat currency are forced to use these currencies if they want to do business and stay out of jail. The bottom line is that it makes no sense to calculate a value for gold by assuming that all the dollars in existence are backed by the US Treasury's holdings of gold. Unfortunately, we can't end the discussion here because AD arrives at his >$50K/ounce gold valuation using a separate line of reasoning that is every bit as spurious as is the one dealt with above. In this case his main error is encapsulated by the following statements: "The supply of physical gold is limited by the output of gold mines at roughly 2200t per year. A temporary increase in dishoarding is possible but in practice this is likely to be a steady amount over time. So the only real scope for a dramatic increase in supply that could massively suppress the gold price is to increase the supply of paper gold." "Real physical gold supply is estimated at 4000t per year (mine + scrap +dishoarding)." In making these statements he quickly dispenses with the pesky reality that the total aboveground supply of PHYSICAL gold is about 150,000 tonnes, and he does so based on an assertion that changes in the ownership of this existing aboveground gold occur via small and steady increments over time. The implication is that the real supply of physical gold is limited to new mine supply plus scrap supply plus a small amount of "dishoarding". There is no genuine support for the claim that "dishoarding" from the existing aboveground gold stock is small and steady, but we don't even need to get into a debate about how much of the existing stock changes hands each year because the entire basis of AD's argument reveals a fundamental misunderstanding of how price is formed in a market. The best way to explain the misunderstanding is to take the hypothetical example of two gold investors named Bob and Fred, who are thinking about whether or not they should sell their gold. In our example, Bob owns one ounce of gold and decides to sell immediately, whereas Fred owns one million ounces of gold and decides to retain his investment in anticipation of receiving a better price in the future. Clearly, in terms of effect on the gold market Fred's decision NOT to sell is one million times more important than Bob's decision to sell, but according to the way AD analyses the gold market the only thing that matters is the one ounce of gold "dishoarded" by Fred. In general terms, regardless of how much of the existing physical gold stock actually changes hands, the decisions of the owners of the existing aboveground gold stock are, collectively, orders of magnitude more important than new mine supply to gold's overall supply/demand situation. It is actually appropriate to look at gold's supply/demand in the OPPOSITE way to how it is looked at by AD, in that new mine supply should be considered as representing a small, steady and largely inconsequential annual increment to the total supply of physical gold. In conclusion, the fact that AD's analysis led to a nonsensical "true" value for gold implied that he began with incorrect premises and/or employed faulty logic. We have tried to show that his most important errors revolve around the assumption that US dollars are backed by the Treasury's gold reserve and the belief that the existing aboveground gold stock can mostly be ignored when analysing gold supply. *"Dow 36000", by Glassman and Hassett, was published just prior to the bursting of the great stock market bubble of the late-1990s. The book's introduction contained the following gem: "[This book] will convince you of the single most important fact about stocks at the dawn of the twenty-first century: They are cheap....If you are worried about missing the market's big move upward, you will discover that it is not too late. Stocks are now in the midst of a one-time-only rise to much higher ground -- to the neighborhood of 36,000 on the Dow Jones industrial average."
27-Jul-10	From the 26th July 2010 Weekly Update: *The Stock Market* The green line on the following chart represents the "Presidential Cycle" Model that we've been monitoring since the beginning of the year. A literal interpretation of the Model implies a July rebound peak, 'choppy' price action during July and the first three weeks of August, a sharp decline from late August through to early October, and a strong rally during the final quarter of the year. The S&P500 Index continues to track this Model as closely as could reasonably be expected. Chart Source: http://www.alphaim.net/signup.html As illustrated below, last Thursday the S&P500 broke above a downward-sloping trend line and its 50-day moving average. This could bring resistance defined by the 200-day moving average (currently at 1113) and the June high (the 1120s) into play in the near future. We don't think the market has much upside potential from here, but the stage does not yet appear to be set for a substantial decline. Our best guess, then, is that in the absence of shocking news there won't be a big move in either direction over the next three weeks.
20-Jul-10	From the 14th July 2010 Interim Update: Gold Stocks Like gold bullion, the HUI has been drifting higher since hitting an interim low during the first few trading days of this month. The rebound resulted in a test of resistance at 470, which is as much as could reasonably be expected from a counter-trend move within a short-term downward trend. With reference to the following daily chart, the HUI's parameters are clear. A decisive close above resistance at 470 would begin to turn the short-term outlook positive, although we would be inclined to keep all hedges in place until the more important resistance at 505 had been overcome. Consecutive daily closes above 505 would suggest that a new major advance had begun. Also, it would open up the possibility that both gold and gold stocks were within a few months of entering 'blow-off' mode, which we currently view as a low-probability outcome. We'll explain in a future commentary (most likely the coming Weekly Update) why we do not expect an upside blow-off to begin anytime soon. Going the other way, there is now important support at 445-450 defined by the early-July low and a trend-line dating back to the February low. A daily close below this support would point to significant additional weakness. Seasonality, the HUI's price action, the likelihood of the broad stock market trending lower over the coming months and the fact that Royal Gold (RGLD) has already broken below a longer-term trend-line (refer to the following chart for details) mean that the odds are skewed in favour of a break below support rather than a break above resistance.
29-Jun-10	From the 23rd June 2010 Interim Update: Gold Stocks Current Market Situation The following two HUI charts look almost identical, even though the first is a daily chart covering the past 9 months and the second is a weekly chart covering the past 3.5 years. Both charts appear to have traced out what technical analysts often refer to as a "cup and handle", a consolidation pattern that tends to resolve bullishly. (Note: If the HUI holds above 460 during the coming days and then rises to the 490s, there will also be a "cup and handle" pattern evident on an hourly chart covering the past 2 months.) The measured objective following an upside breakout on the daily chart would be 630, while the measured objective following an upside breakout on the weekly chart would be 850. In our opinion, consecutive daily closes above 505 would constitute an upside breakout on the daily chart, and a weekly close above 520 would constitute an upside breakout on the weekly chart. Our favoured scenario is that the HUI will test its February low -- most likely during the final quarter of this year -- before commencing its next intermediate-term advance. This scenario is not inconsistent with the idea that the weekly chart is forming a "cup and handle" pattern, the reason being that the "handle" could encompass a double bottom at around 370. However, it is inconsistent with the idea that the daily chart is forming a "cup and handle". We have been intermediate-term "neutral" on the HUI for the past 9 months, a period during which this index chopped back and forth and achieved an insignificant net gain of about 7%. Regardless of whether or not the HUI is destined to re-visit its February low at some point over the next few months the time has come to upgrade our intermediate-term outlook to "bullish", because looking ahead 12 months there is clearly now a lot more upside potential than downside risk. As is often the case, the short-term risk/reward is not as clear. Speculators could operate on the assumption that the short-term outlook was turning bullish, using a HUI close below 460 or a gold futures close below $1220 as a 'stop'. Alternatively, they could reasonably decide to remain agnostic with regard to the short-term, with a large 'core' position based on the bullish long-term outlook and no positions that require the market to do anything in particular over the next couple of months. Exposure could then be ramped up and/or hedges jettisoned following consecutive daily closes above 505. We are taking the latter approach.
22-Jun-10	From the 16th June 2010 Interim Update: *Fitting the pieces of the inter-market puzzle together* The pieces of the inter-market puzzle often don't fit neatly together, one reason being that 'well established' inter-market relationships periodically change. We've recently seen a great example of this with respect to the well-known relationship between the gold and currency markets. More often than not gold performs well when the euro is strong and the US$ is weak, and yet since early February the gold market has strengthened on the back of euro weakness (and resultant US$ strength). We pay close attention to the relationships between different markets, but due to the fact that these relationships regularly vary and sometimes break down altogether we always place more emphasis on individual market analysis. In a perfect world the conclusions based on inter-market analysis will mesh with, and support, the conclusions that stem from individual market analysis, but in the real world there is regularly a conflict. When a conflict occurs we give priority to the individual market analysis. Gold, for instance, is much more of a play on a general decline in monetary confidence than a play on US$ weakness, so it really wasn't surprising that major concerns about euro-zone stability led to the gold price rising in US$ terms while the US$ moved sharply higher against the euro. Currently, the pieces of the inter-market puzzle do fit together quite neatly. At least, it seems to us that they do. For example, a counter-trend rebound in the stock market would be expected to go hand-in-hand with counter-trend rebounds in industrial commodities, the euro, and the commodity currencies, along with some consolidation in the gold market, which is exactly what is happening. The rebounds could continue for a few more weeks, following which the overarching trend -- a trend that involves a shift away from growth-oriented investments towards 'safe havens' -- should resume. *Chasing Performance* Warren Buffett has likened the relationship between an investor and the stock market to that of a batter and a pitcher. The market is continually pitching, but the investor is under no obligation to swing at any pitch. Rather, the investor is entitled to wait...and wait...and wait until he gets exactly the right pitch. For an investor that waits around for the 'right pitch' there will naturally be periods of inactivity. These periods can be tedious and frustrating, but they are essential because there will always be times when the market does not pitch anything worth swinging at. This is even the case within the market sectors where the best long-term money-making opportunities lie, meaning the gold sector at this time. Unfortunately, some investors feel that they should always be actively doing something to increase their wealth, so they quickly jump from one perceived opportunity to the next in a frenetic chase for short-term performance. The result is that they have a more interesting time losing money. We'll take the market action as it comes, but at this stage we expect to see a lot of 'juicy pitches' in October-November.
27-Oct-09	From the 26th October 2009 Weekly Update: Gold Gold's Fair Value A well known gold-market analyst likes to calculate a "fair value" for gold by assuming that the percentage change in the gold price should approximate the percentage change in the money supply, which amounts to applying the simplistic "Quantity Theory of Money" (QTM) to the gold price. The reality, though, is that QTM creates a misleading picture of how changes in the money supply affect prices. It should not be applied to anything, including (especially) the gold market. It is vitally important to understand that an X% increase in the money supply will NOT lead to an across-the-board X% increase in prices. The reason is that new money does not get evenly spread throughout the economy; rather, it enters the economy at specific points and benefits the first recipients at the expense of everyone else. Monetary inflation is, in effect, a means for stealing and redistributing wealth as opposed to a means for raising the average price level. Due to the way it works, monetary inflation will lead to dramatic increases in some prices while other prices barely rise or perhaps even decline. The distortion of relative prices will, in turn, create major economic problems, and once these problems start becoming evident to the masses (including policymakers) the response will tend to be twofold. First, policymakers will try to mitigate the problems caused by monetary inflation by promoting even more monetary inflation. Second, the public will attempt to increase its savings, but due to the blatant efforts of policymakers to inflate their way out of the economic morass created by prior inflation it will begin to dawn on people that it is no longer prudent to save in terms of the official currency. At this point gold could become the focal point of the public's collective desire to save, resulting in a gold price that bears absolutely no relationship to the growth in the money supply. A "fair value" for gold can't be determined based on changes in money supply, but the more general point is that there is no such thing as a fair value for gold. The whole concept of a fair value for gold is nonsensical, because value is subjective. If we had enough data we could perhaps conclude that over extremely long periods of time the gold price had tended to oscillate around a number determined by the difference between the change in money supply and the change in gold supply, but because the gold price has only been 'untethered' since 1971 we don't have anywhere near enough data to do such an analysis. Furthermore, even if we had enough data to do the aforementioned analysis it wouldn't lead us to a "fair value" for gold and it may not tell us anything about gold's future (since the future is not just an extrapolation of the past). Although we shouldn't kid ourselves that it is somehow possible to calculate gold's "fair value", history does give us some clues as to what we can expect from gold over the coming decade. For example, the previous two secular bear markets in US equities have taken the Dow/Gold ratio down to 1, versus its current level of around 10. Financial-market history therefore suggests that gold has additional long-term upside potential of around 900% relative to the Dow Industrials Index. For another example, the following chart shows that the gold/TMS ratio (gold relative to the True Money Supply) was about 5-times higher at its January-1980 extreme than it is today.