Weekly Gold Market Outlook
A Gold & Currency Digest
28-Sep-05
ANALYSIS: Coming Into its Own
"All last year the gold price was going up - but it merely kept pace with the dollar that was going down - now it's rising in real terms," says Max King from Investec Asset Managers in London. "There is every reason to think the price will go on upwards," King said, speaking on Classic Business Day, broadcast week-nightly on ClassicFM - www.miningmx.com/radio/490891.htm
"Real Terms" - that's important. They're also calling for a peak in oil prices.
Before I get into gold, let me point out a couple of things about the Dow and its relationship to gold. Note in the chart below that the Dow/Gold ratio (which is the Dow expressed in terms of gold ounces) has broken down to a new two year low - back down to its 1997 range. Clearly the investor has been better off in gold for several years now despite the currency denominated recovery in stock prices after 2002. In fact, it should be evident from this graph that the advance in stock prices since 2003 has been entirely a monetary phenomenon.
That means that unless you were in gold, oil, or real estate (generally speaking) chances are your portfolio - even if it is up in dollar terms - is going to be down in terms of purchasing power, especially after taxes.
The general overvaluation in stock prices during the late nineties has created a circumstance where the real assets and commodities have absorbed an increasing proportion of the monetary stimulus aimed at stocks; and over the years a gradual change in psychology is thus becoming entrenched, though far from realized: people do simply not love stocks like they used to. In other words, if the Greenspan Fed did today what it did in 1998 - an unexpected 50 basis point rate cut - instead of a tech bubble it would go right into gold and real estate.
I think we're at that point, which is another reason to be bearish on stock (and bond) 'values.'
There is a resilience in gold that is becoming apparent in its decoupling from the stock market, its immunity to the Fed's rate hikes and rhetoric, and in light of the recovery in the foreign exchange value of the US dollar.
The market refused to be tricked into a premature spike on the Rita threat, and the current pullback is normal after a move like we saw in September. I'm seeing support higher than I thought it would be - I thought the market would pull back and kiss the US$456 break out line early this week but the bulls are coming in higher.
It could still happen, but I'm beginning to think that this market is developing a mind of its own.
That means it'll start to go up even when you expect it to fall, like oil has been doing for over a year now.
I mean, this is exactly what's been happening anyway over the past few months.
The market is confident that whatever it says the Fed is going to be instrumental in financing the government's rebuilding plans in the coming months. Moreover, cracks in the economic outlook were already becoming apparent even before the hurricanes - recall that the easing speculations began mid summer. And the technical evidence suggests that the bear market rally in stocks that started in 2003 is tiring… it needs another injection of liquidity! The only scenario that could upset my outlook is if the stock markets went up with bond yields and without a supportive injection of fresh liquidity… sort of like what's happening in the Japanese market today.
A deflation scare is possible but the character
of the market suggests that the bulls aren't as
gullible on that… anymore at any rate.
The anomalous positive correlation in the Dow
and Gold price trends since 2003 has been
running into turbulence as gold keeps on ticking
while the Dow appears to be teetering.
The significance of the decoupling in trends -
besides being one of the expected features of
my hypothesis (thus confirmation?) - is precisely
that it is evidence of a changing character.
If you're as fundamentally bullish on this commodity
as we are, and you think it is as undervalued relative
to the other commodities as we are, these charts
should not be ignored.
The timing for this gold move is good because the
case for a fresh accommodation in money is
stronger with every hiccup in the Dow. That was
our outlook before the hurricanes; the aftermath
of the hurricanes certainly cannot weaken it.
The only missing piece is the confirmation from a
breakout in the AMEX Gold Bugs Index, which is
hovering just underneath the high end of a two-year
trading range that resembles a symmetrical triangle.
I have already covered the reason for this phenomenon
but am still looking for a break out.
The momentum could still shift against us first, but I don't see a strong enough case for the dollar, stock market, or deflation to put off the adjustments that are long overdue in gold prices any longer. My outlook is for the gold sector to shift into higher gear in coming weeks - confirmations/catalysts could come from: 1) the Fed; 2) HUI breakout; 3) renewed weakness in the greenback (European currencies weak but prospects for CAD and Yen are good); or 4) a meltdown in the stock market (consisting of a break down through 9750).
Ed Bugos
Editor - The GoldenBar Report
www.goldenbar.com
September 28, 2005
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