And the Gap Closes!

Today's gold action was highly significant because it gave rise to a closing of the gap on the weekly bar chart of gold that manifested some weeks ago when emotion started to creep into the markets. (Chart courtesy Decisionpoint.com)

Of even greater significance, from this analyst's perspective, was the fact that both gold and the dollar rose today.

In turn, this gave rise to a jump in the goldollar index below:

Of course, neither of these developments gave rise to any buy signals (yet), but they do demonstrate that the "conceptual model" that we have been putting forward may have some merit.

What is this conceptual model?

• The Central Banks do not want the US Dollar to "collapse"
• The Markets seem to want gold to evolve to once again play a monetary role of at least some limited nature
• A "compromise" that will allow the Central Banks to retain control of the World Economy will be to allow both counters to rise simultaneously, or at least allow gold to rise faster than the Dollar falls - so as to prevent a system wide loss of confidence.

If the fall in the US Dollar can be managed over time, and the rate of increase in the gold price can be managed so that it does not happen too suddenly, then confidence in the system can be preserved.

Clearly, over time the US Dollar will eventually cease to be the World's currency. What is at issue is timing. And it does not suit the Central Banks' agenda for this to happen before a fall back position is comfortably in place.

What is that fall back position? Right now I have no firm idea, but I am certain that it will require "time". The Central Bankers will need to buy time to allow a new engine of the world's economy to evolve. Once this has been achieved, the currently "apparently insoluble" economic problems will become soluble.

In my last article I drew the readers' attention to the exponential nature of technological development. The good news that flows from this is that the "S-Curve" of development that previously required decades before a new technology became commercially viable, no longer requires such an extended period of time. This is the single most compelling reason why Dow Theory - which is still exceptionally important - should be seen in a different context than heretofore. Of course, value represents the ultimate foundation of Dow Theory, but it does not follow that therefore, value will take as long to build as it used to. i.e. Time horizons are not the same as they were when Dow Theory was first conceived - and the anticipated duration of a "Primary" Bear Trend may now have become truncated as a result.

Of course, the buy and sell signals will still be as valid as they have always been, but we need to get our heads around the meaning of the concept of the "Long Term". In today's fast moving world, the damage may take significantly less time to repair than any of us might have believed even 20 years ago.

As an aside, I have convinced myself during roughly twenty years of thinking about the subject, that an important driver of the new World Economy will be a "clean" replacement of transportation; and that this clean replacement will be:

• Mass transportation: Magnetically levitated trains
• Personal Transportation: The hydrogen fuel cell

The Japanese and French have been developing Mag-Lev trains for nearly 25 years, and - at least in the case of the Japanese - this technology is now ready to be rolled out on a world-wide basis.

Regarding the hydrogen fuel cell: As an interim measure, the technology already exists to produce hydrogen enriched hydrocarbon fuels (SASOL, Rentech, Syntroleum) which can be dispensed from conventional gasoline "bowsers"; and converted on-board the motor vehicle to hydrogen and with a lower level of CO2 emissions than heretofore. This will buy us time to roll out the infrastructure to store and dispense pure hydrogen, as the fuel cell engine powered cars evolve from on-board conversion to pure hydrogen usage.

And, just this morning a friend sent me some news of an exciting technical development, namely that a process has been developed by Professor Bruce Logan and Dr Hong Liu of Penn State University that may facilitate a low cost production of hydrogen. It is called a BioElectrochemically-Assisted Microbial Reactor (or BEAMR) and it extracts hydrogen from hydrocarbon material in waste water. This said, there may be a double whammy benefit flowing from such technology in that we might be able to extract low cost hydrogen from human sewage waste water; and clean up the environment at the same time.

So where does this leave us with the gold price?

Now that the gap has been covered, we need to wait for the market to give us a signal, and at present there is no "certainty" that the next signal will be a buy signal.

The following chart (courtesy stockcharts.com) shows that the RSI is starting to reach overbought territory, and that the MACD is starting to roll over.

On the weekly chart, the triangle of indecision can be clearly seen

Again there is Good News on the horizon:

• The MACD on the weekly is looking strong, whilst the RSI is not yet near overbought territory.
• The last signal on the P&F charts - which is still intact (see below) - was a buy signal.

Unfortunately, there is many a slip 'twixt cup and lip, and - just to put the knife into the trading community - it might be that the gold price manifests a "false" breakdown to around $375 - $405/ounce before it resumes its bull trend.

Admittedly the probabilities of this do not appear to be great flowing from an analysis of the above charts, but as "trading" is a mug's game, the (relatively small) possibility of such an outcome needs to be highlighted.

Conclusion

Subject to the possibility of a short term hiccough, it seems reasonable to conclude that the gold price will reach at least $490 - $500 on the next run up, and that this will not necessarily (probably will not) occur against a backdrop of an equal but opposite down move in the US Dollar. We may be entering a new "healing" phase in the World Economy.

Caution: This certainly does not imply that an Investment in Industrial Equities is a "safe bet". In this regard, it seems safest to be totally out of Industrial Equities for the time being.