| | |
 What this Business Week writer and so many other misguided individuals in the popular business media are missing are the developments shown by the relationship plotted in the First and Second Graphs. In the Second Graph is plotted the ratio of $Gold to the S&P 500 at year end. While 2005 is not yet in the history book, relative values are likely to change little in the next few days. As many of us know, this ratio turned up in 2000 and gave a major long-term buy signal in 2001. A rising ratio means $Gold is performing better than paper equities. Similar set of events occurred in the 1970's, signaling the beginning of the last bull market cycle in Gold. One would think that a picture is something a journalist could understand, but they have to make an effort to find the picture or talk to someone other than the "paper peddlers" on Wall Street and at mutual funds. This analysis provides the basis for two important activities, value estimates and trend confirmation. If we use the average value of the ratio plotted in the Second Graph, estimated values for $Gold and the S&P 500 can be created. If the average ratio and today's value for the S&P 500 are used, $Gold should be at US$1,533, or 204% above the current level. If today's value for $Gold is used, the S&P 500 should be at 417, down 67% from the current level. Reality will be somewhere in between. However the message is clear, buy $Gold and sell U.S. paper stocks.  The Third Graph portrays only the most recent experience. The circles are the ratios plotted in the previous graph. Note the long-term buy signal that was given when the ratio rose above the moving average at the end of 2001, when $Gold was less than $300. Second, the ratio has risen to a new cycle high. This action is a technical signal that confirms the uptrend. When the price of an asset, $Gold in this case, moves to an absolute high we want the relative measure to confirm that move. The ratio of $Gold to the S&P 500 is confirming the uptrend in $Gold's absolute price. Third, the ratio rising in 2005 means that Gold has again outperformed paper assets. $Gold investors, capitalizing on these trends, have an important ally in their pursuit of profits. The Federal Reserve, by mismanaging monetary policy for nearly two decades, has created $500 Gold. Fortunately for $Gold investors, President Bush is making an equally inept appointment, Ben Bernanke, to serve as the next Chairman of the Federal Reserve System. Dollar denominated investors that have moved to Gold and those foreign investors that have shifted assets out of dollar investments will be well served by the new chairman. Bernanke's baggage includes both his Delusion and his Illusion as well as his fear of the last Depression. The Delusion contends that the U.S. current account deficit is not the consequence of bad monetary policy. Rather, that deficit is the fault of other countries not also pursuing a consumption binge. If consumers in foreign countries would also spend more than their income as is the case in the U.S., the U.S. deficit could be filled. In short, two economic wrongs would combine to make one economic right. The Bernanke Illusion is that if monetary policy was managed based on a measure of inflation an economy in equilibrium would be the consequence. Unfortunately, the measures of inflation created by the U.S. government border on the nonsensical. No private company would be permitted to issue such misleading statistics. That aside, this concept of inflation targeting looks fine on a two dimensional classroom blackboard. The real world is not a chalkboard. Monetary policy based on this "inflation rule" is the equivalent of driving your car with a speedometer measuring in bushels rather than miles per hour. $Gold investors will be rewarded with profits by investing in real money, not by following chalk dust illusions. Monetary policy, based on the Chairman's desire to please political forces and the Street, has been generally unwise. That, however, has been how U.S. monetary policy has been determined for two decades. Continuing that approach, the Federal Reserve recently announced the intended suspension of the data release on a broad measure of the U.S. money supply, M-3. The European Central Bank(ECB) takes a different view of the matter, and recently raised rates as a consequence of money supply growth.
The differences in these approaches is worth noting. The ECB thinks "printing" too much money is a policy error on the part of the central bank. Excessive money creation would likely will lead to price increases and a reduction in the purchasing power of the Euro. Then we have the Federal Reserve which does not believe that even reporting complete money supply data is a worthwhile effort. The ECB pays attention to how many Euros exist in the world. The Federal Reserve sets policy based on using interest rates, easy money, to hype one part of the economy or another. In the future, monetary policy will be based on the chalkboard theories of a new chairman. Little doubt exist that with these different approaches that the U.S. dollar is set for further depreciation.  Our Fourth Graph considers the recent action in $Gold. Policy mistakes, of years past and yet to come, and a structural trade deficit mean that the long-term bear market for the U.S. dollar continues without interference. Well-positioned investors will benefit from policy ineptness at the Federal Reserve as far as one can see into the future. Investors denominated in U.S. dollars need to move in a timely fashion into Gold. Waiting till $Gold is trading well above $1,300 will be too late. As shown in the Fourth Graph, $Gold has been moving toward another important buy signal. This week's rally will likely be followed by a down leg into that signal. Dollar denominated investors need be prepared. Canadian investors have a strong imperative for investing in Gold. First, the future for the Canadian dollar is inextricably linked to the fate of the U.S. dollar. North America is a single economic boat. We are all in it together. When a boat sinks, the whole boat sinks. Second, the rally of recent years in the value of the Canadian dollar versus the U.S. dollar creates a rare opportunity for especially timely purchases of Gold. Do not let the paper money illusion keep you from making wise long-term investments. As the Fifth Graph portrays, CN$Gold may also, after this week's rally, work itself into another important buy point.  References:
Ned W. Schmidt, CFA,CEBS Click to email me: nwschmidt@earthlink.net December 28, 2005 Ned W. Schmidt,CFA,CEBS is publisher of THE VALUE VIEW GOLD REPORT. That report now includes a weekly message, TRADING THOUGHTS, to help investors identify timely points for buying Gold and Silver. You can join him for the Gold Super Cycle at http://home.att.net/~nwschmidt/Order_Gold_EMonthlyTT.html His monumental report, "$1,265 GOLD", which has now been read in 12 countries, has 255 pages and 98 graphs, is available at www.amazon.com or from the author. Ned welcomes your comments and questions. His mission in life is to rescue investors from the abyss of financial assets and the coming collapse of the U.S. dollar. He can be contacted at nwschmidt@earthlink.net.
Email this Article to a Friend 316298929 |
 |  |  |  |  |
Printer Friendly Version
Email this Article
