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May 25, 2008

Why Gold Will Be Whacked Again
by Alex Wallenwein

Gold has recovered from its previous two "whacks" rather nicely this past week and the Friday before, but it will very likely be whacked again very soon, possibly as early as this coming Monday.

Why?

Because gold is rising while the Dow/US stocks are in ultra-dangerous territory.

That is the one thing the "powers" cannot tolerate. Confidence in the dollar is apparently no longer a necessity for those who operate our economy from behind the scenes. In fact, a falling dollar is utterly desirable for them, for reasons to be discussed below.

A primary stock market collapse, alone, is also not to high on their list of no-nos, but a collapsing stock market alongside a collapsing bond market alongside rising gold prices cannot, must not be tolerated.

If such were to come to pass, investors would have no place else to go but to foreign stocks - and to precious metals stocks.

Here is what's happening to the Dow:

After breaking its resistance line in April during what looked to many as a "powerful rally", the Dow has betrayed the fundamental weakness of its recent, post-Bear Stearns, recovery by shying away from its 200-day moving average twice, breaking its recent uptrend, and falling below even its 60-day moving average. It is now about halfway between its resistance and its level 1 support.

This is what it looks like from closer up, time-wise:

The engineered nature of this phony uptrend was revealed by the fact that it consisted largely of huge one or two-day rises which were inevitably followed by a series of smaller drops that at first capped and frequently eventually all but negated the previous rises.

Normal, healthy uptrends just don't look that way.

I would venture a prediction that, as soon as the Dow hits or crashes through support level 1, gold will be whacked again. If not, the Dow threatens to fall through its level 2 support, which would bring it below the January 200 high of 11,750 - and that would finally reveal that every bit of the Dow's recovery since then was contrived.

The NYSE looks very similar, except that it briefly managed to break above its 200-day MA before succumbing to its fundamental weakness, and except for the fact that its support level #2, going back to January 2000, lies far below current levels, namely at 7000. Which only means that, once it breaks below support level 1, it has along, long ways to go before it finds support.

The fundamental picture supports these chart views. Inflationary expectations are high, oil prices are high and climbing with no end in sight, US economic activity is declining, and the dollar is dropping out of sight, which makes investing in US assets far less profitable for foreigners with stronger currencies.

Under these conditions, profits are hard to come by for US companies, so their stocks tend to be weak.

At the same time US bonds have passed their historic peaks and are now engaged in a secular decline. If we're lucky, that decline will show itself only gradually, but it is very possible that it will come abruptly. That means US interest rates will be rising in spite of the Fed's frantic attempts to keep them low so as to "re-ignite" the economy.

Unfortunately, the only thing the Fed will set on fire is its paper currency - and that's why ultimately, gold will not be suppressed for long. We are now approaching June. By the end of August or early September, the next leg up in gold's price will begin. That's only three months away.

Yet, for right now, gold is still vulnerable. Indians are no longer buying much and have started to sell. Jewelers are having a hard time because their gilded adornments are getting too expensive for cash-strapped customers. Investment demand is up world wide, but the word still hasn't gotten around to western mainstream investors quite yet - and that is what must be avoided at all cost, even if such avoidance amounts to nothing more than delays.

Gold has only surpassed short term trend lines 1 and 2. Number 3 is still a ways off, which means gold has not yet surpassed its most recent high. At the same time it is struggling to stay above its 50-day moving average. The more vulnerable gold is, the easier it is for the powers to effect a swift and severe downward move. In view of the current Dow-situation, their window of opportunity is very small.

Expect them to first try another artificial boost to the Dow by extensive futures buying on Monday morning. Maybe some concocted news of concocted economic data will be published. Most likely, that won't work, though.

That's why gold will be whacked, again - but so what? Investing is more fun when you can buy cheap.

Got gold?

Alex Wallenwein
Editor, Publisher
The Euro vs Dollar Monitor

Just like driving your car, investing only makes sense if you can see where you are going. The Euro vs Dollar Monitor is your golden windshield wiper that removes the media's greasy film of financial misinformation from your investment outlook. Don't drive your investment vehicle without it!

Copyright © 2003-2008 Alex Wallenwein

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