For short-term gold investors, last week was not an enjoyable one. For it was during that time that gold's long-term technical support at $285/oz. gave way in a deflationary shock wave that saw the CRB commodity index break below its critical $200 support. The CRB index—a broad-based measure of the general health of the entire commodities sector—now faces the possibility (indeed, the inevitability) of an outright crash, which will bring worldwide commodity prices to levels not seen in decades. All of this is in keeping with our long-term deflationary forecast.
While gold can be expected to fall right along with the overall commodities sector, we do not view this as inherently bearish for gold bugs, especially over the long run. Yet we continue to recommend light accumulation of the metal on each fresh decline in the yellow metal's price—a seemingly convoluted paradox. Yet there is a very good reason for our stance. Stay tuned and find out why.
Gold's most recent woes began last summer with the onset of the Asian currency crisis that left (and continues to leave) many Asian currencies, including the Japanese Yen, severely beaten against the U.S. dollar. This weakness in the Asian currencies against the U.S. Dollar forced many Asian countries to liquidate their gold holdings in order to raise much-needed cash. You see, in the infant stages of any monetary collapse, liquidity becomes imperative and anything and everything that can be sold—including gold—will be sold in order to raise needed cash. This explains gold's price decline over the past year.
This debilitating weakness in the Asian currencies against the U.S. Dollar instilled a false sense of security among U.S. and global investors in the "strength" of the Dollar. But as gold analyst James Turk explained in a recent issue of his Freemarket Gold & Money Report newsletter, the Dollar is actually still in the midst of a secular bear market and its recent "strength" is nothing more than a product of a bear market rally. Also, the contrast of the Dollar against the anemic Asian currencies gives the Dollar the appearance of being stronger than it really is. Thus, many investors have been fooled as to the true state of the U.S. Dollar. The summer of 1997 through the summer of 1998 marked the first time in our generation when gold's Dollar price failed to keep up with the cost of living. This was also the first time that the old adage that an ounce of gold will always buy a tailored men's suit, no matter what the state of the economy, did not hold true, as the Dollar price of gold actually fell below what it costs to buy a high-quality suit. But that trend was short-lived and now appears to be ending as the U.S. Dollar comes into equilibrium with the trend in the overall commodities market.
Turk also pointed out that the Dollar declined significantly last Thursday and Friday (Aug. 27-28), even against the pathetically weak Australian and Canadian Dollars. And, he says, gold has not registered a high versus the Swiss Franc or the Deutschemark since August 1997. So there is no rational reason to believe the U.S. Dollar is experiencing a true bull market.
If the Dollar has indeed completed its bear market rally as Turk hints (and as our Elliott Wave analysis suggests), the Dollar can be expected to fall right alongside gold, thus reaffirming gold's inherent purchasing power. While the Dollar price of gold will still continue to fall, it will once again be commensurate to the cost of living and will continue to provide a reliable storehouse of wealth and will afford financial protection throughout the growing economic crisis. And of course, we are that much closer to gold's ultimate bottom before it reverses course to begin a fresh leg of its next bull market (which we expect to coincide with the new millennium).
From a technical perspective, gold's daily price chart as well as its longer-term chart shows continued weakness. In fact, to be perfectly blunt, the technicals for gold look atrocious. Our daily candlestick chart—which has proven quite accurate in the past—has literally fallen off the chart (our measurements only extended down to $285/oz.—gold's long-term support). We are now forced to redraw our charts to include the December contract low of $273/oz. Gold broke out of a contracting triangle formation last week to fall to its current low levels. Gold's weekly chart shows what appears to be a bearish "flag" formation that portends continued price erosion. But of course, we all should have known this to be the case as soon as gold broke below its established support at $285/oz.
Gold may have lost its luster to the average investor, but we remain long-term bullish on the metal and advise our clients and subscribers to lightly accumulate it on each new decline. We especially recommend purchasing gold bullion coins in U.S. Gold Eagle and Canadian Maple Leaf form. Many ask, "Why buy now in the face of falling gold prices? Why not wait until the bottom has been reached before jumping in and buying?" The answer is simple. First, an investor should NEVER be caught without a strong position of gold in his or her portfolio—no less than 10-15%. Second, now as never before, gold ownership is necessary to survival and asset protection from the myriad threats posed by the imminent possibilities of a.) currency devaluation, b.) bank asset confiscation by governments in the event of a financial panic, and c.) the coming Y2K computing crisis. While it may technically we smarter to wait until gold's ultimate low before buying, there is no guarantee the investor will be able to obtain gold when those levels are reached. The safest bet is to buy now while gold is still readily (and legally) available. And don't forget, the price of gold should stay commensurate to the value of the U.S. Dollar from this point forward, meaning that even as gold's price declines, so too will the value of the U.S. Dollar. Thus, an investor who buys gold at, say, $250/oz., and sees an additional drop of $10/oz. in gold's price, will not have lost money on his purchase, as the value of the Dollar will also have declined.
Because of the unique situation that now exists in the gold market, it is theoretically possible to be both long and short and make money both ways. For example, while we recommend picking up bullion coins for long-term investments and asset protection, we also recommend short selling rallies in gold's futures price. We also believe opportunity exists to make money by shorting the stocks of mining companies, which stand to lose even more money than they have recently as gold's price continues to fall.
Investors shun gold today only because its value is only considered in terms of Dollars. However, the day is nigh approaching when gold will no longer be thought of in terms of Dollars, but in terms of inherent value. When the dust finally settles from this worldwide deflationary economic collapse, gold will remain as the sole survivor and will be unanimously recognized as the only true form of money and storehouse of wealth as well as the only financial instrument to survive unscathed from the fallout.
1 September 1998
Clif Droke is editor of the weekly Leading Indicators newsletter covering U.S. and global equities markets and general socio-economic affairs from a technical perspective. For a free sample copy of Leading Indicators, or to subscribe, write to: 816 Easely St., #411, Silver Spring, MD 20910; e-mail: email@example.com
Also by Clif Droke
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