A closer look at the Yellow Metal
Sol Palha
Curst greed of gold, what crimes thy tyrant power has caused
Virgil c. 70 - 19 BC, Roman Poet
Many writers make it look like every investor should take a side in this war that is supposedly going on in the Gold Markets. We are not going to deny the fact that manipulation is a rampant and common occurrence in the gold markets. There is really no market out there that can be called free in the true sense of the word and so turning this is into a war situation is simply futile. What we should be doing is studying how the manipulators move and then positioning ourselves so that we can benefit from the next move. However this is not today's topic so lets take a closer look at Gold bullion, Gold shares, and the XAU and HUI indexes.
I am going to list the monthly closing prices and for the month of July I will use Fridays closing prices.
A quick look above and we can see that while Gold bullion is trading at a higher price today then it was trading in May 2004, the same cannot be said for most Gold shares.
In addition both the XAU and HUI are trading below their May levels. I randomly listed 12 Gold shares; only 3 are trading above their May closing prices the rest are trading well below them. At the very least you would think they would remain unchanged since bullion has virtually done nothing for the last 3 months, but instead they keep drifting even lower.
Could it be that they are sensing the first signs of deflation in the atmosphere? If you look at the dollar you will notice that it has been slowly but surely trading higher since February. In addition everywhere I go now I am noticing that prices are dropping. All of a sudden you can find strawberries for a dollar again in New York, tomatoes prices have fallen as low as 70 cents a pound, microwave ovens that were selling for 40 dollars are now selling for 29 dollars in Wal-Mart, a 5000 BTU AC for under 90 dollars etc. Computer Manufacturers and car dealers are falling over themselves and offering consumer's huge cash back incentives and the list goes on.
We seem to be in a gray murky area and the fact that Gold is having trouble holding above the 400 mark indicates that in the short term deflation might be a real and possibly potent threat.
Quite clearly you can see that the short-term trend in Gold is down; a break past 420 would indicate strength and a break past 430 would signify that much higher prices are in the works.
One can see that the down trend line was clearly broken in February and since then the dollar has been slowly trending higher. You will notice the nice double bottom formation in February, which was then followed by pretty fast sharp upward move. The dollar then consolidated from May till the middle of July. Now the dollar is trending upwards again and the price of Gold has once again fallen below the 400 mark.
The only commodity holding up well in the face of strong dollar is oil. That's perhaps one of the biggest reasons why the dollar is being propped up, to try to mask the rise in the price of crude oil. Imagine if oil prices are rising in the face of rising dollar where they would be if the dollar had continued to fall. Interventions like this can go on for several months and can lead to momentum players and then the masses jumping on board, which could further propel the dollar. In addition it is even possible that the threat of interest rate hikes is having an effect on how much the consumer is willing to spend. The huge debt out there is basically equivalent to a short against the US dollar. So if these chaps start to cut back and perhaps even start paying down their debt, things could really heat up.
Conclusion
We are getting many subtle signals that deflation is here and is probably going to be the first monster to fully rear its head. Gold bullion hardly corrected at all when you compare it to the steep correction most Gold stocks have undergone and are still undergoing. But Gold's inability to stay over the 400 mark is troubling. The renewed strength in the dollar also adds credibility to the argument that Gold stocks and increasingly Gold bullion are sensing deflation and not inflation in the immediate future. A break past 430 on good volume would invalidate this argument. Currently the outlook is far from clear, and this deflationary scenario could change rather fast into an inflationary one. Until gold breaks its short term down trend and we see more strength in Gold shares the prudent thing to do is to sit and watch from the sidelines. We still view silver as the stronger of the two metals.
I would like to conclude with the following saying "only fools think they are Gods and only Gods create fools"
Sol Palha
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Gold, inflation or Deflation
Alan Lunt
Since I started investing I have had a special spot in my psych for gold. But there are many things to remember. The last bull market in gold was in the 70's, the summer of Kondratief seasons, a time when inflation ran rampant. Gold reacted to inflation in textbook manner; it flew with the angels. Now we are at the apex of the seasons, autumn into winter, and whether the central banks like it or not they have deflation to fight. Maybe they will win, maybe; but one thing is sure, gold will smell deflation first.
One of the most common complaints at the end of the inflation scenario is the cry that there is NOT ENOUGH money. Once you hear that cry you will know people are cutting back on the spending. Goods will not be purchase, will not be made and will not be consumed. Gold has sniffed that already. It will still be a store of value, but will probably not reach the heady heights most people are predicting. The rule of thumb is an ounce to buy the Dow. What if I said the Dow may go back to it's first up trend line. That is somewhere short of 2000. Is it any wonder the lads at the Federal Reserve are printing like a madmen, if only to hold the markets up.
If 2000 occurs you will know we are in a depression, a Kondratief winter. You will know deflation is here and you will know that your gold will keep you alive, but as for getting horribly rich............. probably not.
The dollars strength can be attributed to people wanting it, a conundrum if ever there was one. But naturally if there is not enough and everyone wants some, the price will go up. Deflation is a shortage of money. Less money, more goods equates to falling prices. That is not good for gold. I was of the view that the dollar was toast, but if central banks conspire to print money to buy dollars and hold their own currencies in check then the chances of a massive decline are diminished. So the conclusion I come to is that the dollar will hold value in relation to other currencies, gold trades like a currency, so therefore it will hold its value, end of story.
But what about oil? Black gold, Texas tea. This is where the central banks come unstuck with their plan. A strengthening dollar is good for the US consumer as it masks the price hikes of oil in the US. But since oil is priced internationally in US dollars and central banks are trying to devalue their own currencies, all they are doing is increasing the price at their own pumps. Will that mean less is consumed, probably not. But it does mean that there will be less money to spend on goods elsewhere. Here we go again, less money. Prices elsewhere have to fall. What a tangled web our esteemed leaders have woven for us.
And guess what? It won't be their fault!!
© 2004 Alan Lunt
www.tacticalinvestor.com
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© 2004 Sol Palha
TACTICAL INVESTOR
www.tacticalinvestor.com
info@tacticalinvestor.com
4 August 2004
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