Opportunists or Serious Investors?

May 1, 2004

Overall Conclusion

Neither "Opportunists" nor "Serious Investors" have been driving commodity prices in general, or the gold price in particular. What has ultimately been driving the upward momentum of the gold price is the ocean of fiat currencies that have been flooding the markets. Across the commodities spectrum, we are witnessing yet another bubble in the making.

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Analysis

The breakdown from the neckline in the H&S Shoulders weekly chart of the $XAU implies a target destination of around 72 (with no time horizon), which currently happens to be slightly above the long term upward pointing trendline. On the other hand, the momentum and oscillator are in oversold territory and "traders" might see this as a buying opportunity. (Chart courtesy Bigcharts.com)

But the long term chart below shows that the 24 month MA (half economic cycle) has been penetrated on the downside, as has the Parabolic SAR. The overbought MACD line is giving a sell signal, and both the Momentum and ROC will give sell signals if they start to move into negative territory.

It follows, therefore, that one of the more important questions one now needs to address is: "What has been driving the gold bull market to date?" If "Opportunists" have been piling into gold, the long term up-trendline may be penetrated on the downside; whilst if gold is indeed in a Long Term Bull market, this level (70-80 on the $XAU) might represent a buying opportunity.

One should bear in mind that there have now been around 134 million hits on the Gold-Eagle site, and so gold is definitely not a "secret" any longer. If we assume that around 5-10 million investors/speculators now regularly visit this site, it is probably important to take a view on the psyche of the population within the distribution curve.

Some of the contributors to the editorials in this site are heavyweight thinkers who have commanded respect over decades. Some are relative newcomers, whose work shows deep insights, and some are a little bit light-on. The vast majority are overall bullish on gold - but this might be partially influenced by the editorial selection process, and so one should not stretch the bow too far here.

On balance, it seems a reasonable proposition to postulate that the distribution of writers reflects the distribution of readers, and that we are probably dealing (in this particular subset of Society) with people who are seriously concerned about the world's economy - on a spectrum ranging from hysterical to carefully considered.

Against this background, it might be constructive to take an ultra high level view, so let's exchange the microscope for a telescope for a brief moment.

Its seems reasonable to argue that within any given Society there are four types of personality profiles:

  • Conceptualisers
  • Facilitators
  • Implementers
  • Healers

There is probably a fifth category, namely Voyeurs, but this latter category does not really have an impact on Society's destiny. These people watch, but typically do not act.

In a business context, the Conceptualisers, being, cerebrally driven, are often to be found in R&D departments and cutting edge industries. The Facilitators are people such as economists and financiers, and the Implementers are actual "doers" such as entrepreneurs and managers. Healers (such as medical practitioners who treat the mind and body; and religious leaders who treat the soul) are not typically attracted to the business subset of Social activity.

Many of the problems currently being faced by the world's economy flow from the Facilitators having become too enthusiastic about "yesterday's" concepts - in particular, yesterday's materialistic concepts. Excesses have therefore manifested ; and obtuseness, arrogance and stubbornness have prevented the Facilitators from admitting that they have indeed been guilty of excessive, imprudent behaviour.

This has raised the pressures being placed on the Implementer community and, in turn, the cost of attracting top class Implementers - who have the ability to maintain the rickety "legacy" system - has skyrocketed. CEO's of large corporations are being paid obscenely large amounts of money. The value of top class Conceptualisers has also risen, and this is the primary reason why the Nasdaq bubble emerged. Unfortunately, mal-investment caused too much money to be thrown at too many flaky concepts, and a lot of money was lost. The money kept pouring in (courtesy of the Facilitators) and bubbles emerged in the Bond Markets and the Real Estate Markets. Even the tourism industry has exploded and five star hotels can now be found on every "deserted" island on the planet.

With so much cash floating around, the rich have become immensely rich. But the middle class are now drowning in debt, and the poor are suffering in unspeakable living conditions. Armed conflicts have been erupting. Anti Semitism has been rearing its head. These are symptoms that Society as a whole is now once more in need of Healing.

From an environmental perspective, we are facing two unprecedented (in our lifetime) problems:

  1. The magnetic field of the planet has been weakening (down 10% from its peak over the past 300 years), and computer models are now predicting an imminent "flip" of the magnetic poles (The word "imminent" should be put into perspective. Such flips have "regularly" occurred every 250,000 years or so, and we are now theoretically overdue for another one)
  2. Global warming is threatening the viability of all biological life.

All of which brings to mind the old aphorism: "Eat, drink and be merry, for tomorrow we die". Perhaps Society as a whole is sensing that we are beyond the point where worrying will be constructive.

Ignoring the magnetic field issue, most of our problems have manifested because there have been inadequate checks and balances in society's power structure. Too much power has resided in the Facilitators camp, and they have run amuck.

But history shows that when "Man" cannot control his behaviour, "Nature" has a way of stepping in to redress the imbalances. A rebalancing is then "forced" onto Society, and life starts anew and afresh. Historically, Anti Semitism has been the litmus test which has pointed to imminent Social catharsis. The litmus paper is clearly changing colour - yet again.

From an economic perspective, it seems to me that very few people truly understand that the Gold Price is (potentially) the ultimate barometer of Social pressure. The "price" of anything is an artificial concept that of itself is bereft of meaning. By way of conceptual example, how would a dolphin explain the concept of "price" to its offspring?

Mankind has invented and lived with this concept of price as a means of facilitating an exchange of goods and services, but where there is no need to exchange anything, there is no need for a price of anything.

In the West, we are not "short" of any material things. In reality, there is a surplus of "things".

BUT PERHAPS THERE IS NOW EMERGING A SURPLUS OF FIAT CURRENCIES RELATIVE TO THE SURPLUS OF "THINGS" IN GENERAL

So, coming back down to Earth, and putting on our reading spectacles once more, what can we say about the rising gold price?

The Facilitators, in their grab for power, have tried to corner the market on the "media of exchange", and paper currencies are now accepted as media of exchange by Government decree, or "Fiat". Ultimately, a rising gold price may become a symptom that, perhaps, the confidence in this fiat currency is eroding ; but the evidence suggests that the timing for this particular rationale is not yet right. The market as a whole is not yet showing signs of any "panic" or even yet of imminent "structural change".

The following chart (courtesy StockCharts.com) shows the gold price relative to the commodities index in general

What it shows clearly is that gold is in a bear trend relative to commodities in general, and that the relationship has recently broken down through support levels.

Using the horizontal count method, the target ratio is around 124, or some 13% below its current level. BUT IT IS CRITICALLY IMPORTANT TO ACKNOWLEDGE THAT THIS TARGET DOES NOT REPRESENT A NEW LOW.

Why is it critically important? Because if gold were to be ONLY regarded as a commodity, and if the economy were to experience an implosion, gold as a commodity would have very little value ie One would expect gold to fall further than generally "useful" commodities such as (say) copper.

Can we postulate where the commodities index might be heading?

The following chart, (source: http://tfc-charts.w2d.com/chart/RB/M) appears to be manifesting a significantly bullish long term trend which, incidentally, began to emerge towards the end of 2001.

TFC Commodity Charts
CRB Index Futures (RB, NYFE)
Monthly Price Chart

It is probably not a coincidence that the gold price also started to rise from its lows at around that time (chart courtesy DecisionPoint.com), and BOTH appeared to have had false starts in around mid 1999.

The Commodities Index seems to be a bit overbought (nothing goes straight up without pause), and it could be argued that we are due for a technical downward reaction, with gold falling relatively faster than the Commodities Index during this phase.

However, ratcheting the microscope down a bit, we see that Commodities are actually quite strong.

And the daily chart seems to be pointing to an imminent "buy" signal - with rising bottoms and an MACD line that is now rising from a deeply oversold position. Note also that the MACD Histograms are also rising from their lows.

Summary and Conclusions

From the Relative Strength chart above (Point and Figure) is can be concluded that there was a time when the enthusiasm surrounding gold got ahead of itself, and gold rose faster than commodities; and that this relativity is now coming back into balance.

The bottom line appears to be that "inflation" in the true sense of the word (an increase in the volume of fiat money in the system) is what has been causing the dollar denominated prices of all commodities (including gold) to rise.

Specifically:

  1. An explosion of the volume of Fiat currencies have given rise to an increase in the dollar denominated prices of commodities. (It does not necessarily follow that there is an excessive demand for commodities. More likely, there is an imbalance in the relationship of the inventory of Fiat currencies to the inventories of commodities).
  2. Gold is pulling back because it was the subject of excessive (misplaced and/or incorrectly timed) enthusiasm relating to its role as the "ultimate" currency, but it looks like the gold price (like the Commodities Index) may still be in a long term up trend
  3. If Gold ever breaks up to new highs relative to the Commodities Index, THAT will be objective evidence that a new, currency related, role might be emerging for gold.
  4. That time has not yet arrived
  5. Whilst it will not address any of the deep rooted and serious structural problems that face us on a global Societal level, it is probably safe to start (slowly) adding to one's gold related investment holdings. There is some moderate risk given that gold still has some downside potential relative to commodities in general. However, the emphasis is on the word "moderate" and long term investors can now start to breathe normally once more.
China has only 2% of its Total Foreign Reserves in gold.