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November 08, 2004

Suspension of Disbelief
by Captain Hook

If you have read a novel or two, you may be familiar with the concept in the title above, where an author will weave the story such that one becomes invariably 'hooked' on discovering a previously unexpected outcome, rendering you unable to put the book down until that last page is turned. As this concept pertains to gold, the political metal, there is little doubt writers are endeavoring to weave a tangled web within its story line, where the potential triple top in price has thickened the plot, and where a test of the establishments ability to spin your attention away from the 'true' story is skillfully laid down for you every morning in the financial papers on infinitum.

Without a doubt, those currently aware of the spell binding drama associated with gold's story are hooked, including both line a sinker, as the outcome, for which we will likely wait years to witness the climax, will in the end have a material effect on all of us in one way or another, making it an all time best seller as word spreads through the popular audience. And while this story remains a difficult sell to establishment types, who extend through the very fabric of our society, and benefit from the continued destructive 'socialization' of our system, at some point, even they will be forced to 'recognize' no matter how many false story-lines are interwoven within the plot, in the end there can be only one outcome, as there is only one true story.

What's the true story? If one has read our recent efforts to aid in illuminating this saga, in addition to the valiant efforts undertaken by others, you would know it's the risk of an accelerated currency debasement agenda in the States moving forward, jeopardizing stability in the world's fiat reserve currency, the Us dollar. Further to this, one should realize the majority of market participants, so called experts on the subject, and in effect 'the public' at large continue to live with belief that the current storyline (i.e. fiat currency system) is the true story, and not the ill-conceived antithesis a rapid acceleration higher in gold's price would signal. It could be argued from a more informed perspective we are at a critical turning point in the central theme of this story however, as gold appears to be staging for just such an outcome at present, evidencing a 'suspension of belief' in its role as the world's true reserve currency if you will, and marking the point of 'recognition' in markets hyperinflation is a distinct possibility in the future.

Socialists are quick to argued from an official standpoint gold has performed its function as an inflation hedge since the US abandon Bretton Woods in 1971, where it has increased a factor of ten, mirroring actual price inflation of the things we use in our every day lives. And while this may be true, it's important to understand gold's role in the story is not to keep tabs on the past, but signal future inflation, where in effect a meaningful advance beyond the $425 area would indicate just such a risk from a historical perspective. As you will see in the chart below, gold appears to staging a meaningful advance at present, which means an accelerated currency debasement agenda on the part of authorities is to be expected. (See Figure 1)

As denoted above, meaningful monthly milestones are falling in terms of gold pricing, evidencing more and more market participants are now seeing the 'big picture' more clearly, and that the population of these investors is growing, as a 'suspension of disbelief' in the bull market unfolds before our very eyes. And at this point, we could extend our discussion into a plethora of causal factorings associated with this advent, such as a favorable turn in paper gold pricing peculiarities of late, or the implications of a non-supportive international environment as it pertains to continued demand for US dollars, but we will leave such discourse for another day.

Instead of delving into the story-lines of numerous factors causing attitude changes in precious metals investors today, we think it best to keep this treatise simple, focusing on the 'primary' factor, which as you will see in the end is complicated enough on its own. What is the primary factor in this regard? Some would be quick to answer its 'inflation' of course, referring to rising prices in goods and services. But, as many of you know, rising prices are a product of the real culprit, money supply growth, and more specifically as it pertains to gold pricing as signal of an accelerating supply condition, currency growth. (See Figure 2)

Further to investigations such as the above, I believe you will find it illuminating that a reasonably tight averaged correlation coefficient between M1 and gold prices exits, where lags in gold pricing against growth of cash equivalents in the US system suggest current levels are behind the curve, kindred to the argument the Fed is behind the yield curve on this basis. Of course a growing innate weakness in the 'socialized' economy of the States calls for an increasingly 'twisted' storyline as events unfold, which is causing growing confusion in the minds of market players. In effect, and where one could argue many were completely unaware in the first place, most have taken their eyes off the ball in this regard, which again, is money supply growth. Here is a picture that suggests market participants are due for a 'shock' very soon however, as the sheer force of all those new dollars out there causes a meaningful breakout in the price of gold, which as you can see is in fact not discounting increased currency inflation in the future yet, but just catching up to existing conditions, implying the move could be quite rapid. (See Figure 3)

Evidencing assertions made above are in fact founded in reality, one would expect to see the external value of the US dollar suffer if this were the case, and in fact this is exactly what is happening. It's simple supply and demand economics at this point you know. (See Figure 4)

Further to this, and evident in the surging stock markets of late, increasingly investors are searching for familiar means to protect their wealth from the ravages of monetarily induced price inflation, as many still don't buy the gold story, but at the same time know they must do something. You can't blame them for their apprehension as it pertains to investing in gold, as many a fortune has been lost betting against our 'banking society' over the past 25 years, because they know not good measure anymore. (See Figure 5)

But one has to remember rising stock prices do not necessarily mean an individual is any better off in terms of purchasing power, and externally measured comparisons. Just think of what the prices of other things will be when a cup of coffee at Starbucks is $10. In support of our projection in Figure 5, here is a snapshot of where the Dow could be heading over the next couple of years, extended valuations or not. It the expanding money supply you know. (See Figure 6)

If there is one message we would like to leave you with today, in effect being the 'moral of the story', it's that you as an investor must make logical decisions as to best conform with established objectives given a continuously changing environment, where market movements often do not develop as expected, but never the less are always correct. Therein, it makes a great deal of common sense to endeavor in discovering as much information about a particular market as possible before making investment decisions, within the full measure of time if possible. We hope the above has aided you in this regard as it pertains to precious metals markets, as it appears there is convincing evidence 'sea change' magnitude transitions are currently underway, a natural progression in any market as a matter of sequence.

What's more, we feel comfortable in hypothecating precious metals investments of all varieties are entering a period of bull confirmed / recognition stage status at present, evident not only in technical underpinnings found throughout the various markets, but also increasingly so within investors attitudes, as greater numbers appear sanguine about both acquiring and holding positions in the sector. Importantly, you as an investor should realize the bull market in precious metals is still in its infancy, and that great opportunity still exists while the market remains suspended in disbelief, implying most meaningful gains lie ahead as a hesitant population succumbs to the normalization process found within lifecycle.

In this regard we are of the opinion that precious metals market(s) are on the very cusp of 'suspension of disbelief' as it pertains to the bull's status, where after the story becomes clear to all, prices across the sector will enjoy meaningful advances in apportion to a more accurate reflection of the fundamentals. Failure to make the proper decisions today, could lead to a sad conclusion for you tomorrow, as your lifestyle decays with fiat currency specie, no matter which locale you inhabit through time.

We very much hope you find the above of some use, and if one wishes to continue sharing in our ideas regarding various market opportunities as we see them, simply follow the instructions found below.

Until we meet again.

Captain Hook
TreasureChests.info

Treasure Chests is a market timing service specializing in value-based position trading in the precious metals and equity markets with an orientation geared to identifying intermediate-term swing trading opportunities. Specific opportunities are identified utilizing a combination of fundamental, technical, and inter-market analysis. This style of investing has proven very successful for wealthy and sophisticated investors, as it reduces risk and enhances returns when the methodology is applied effectively. Those interested in discovering more about how the strategies described above can enhance your wealth should visit our web site at Treasure Chests.

Disclaimer: The above is a matter of opinion and is not intended as investment advice. Information and analysis above are derived from sources and utilizing methods believed reliable, but we cannot accept responsibility for any trading losses you may incur as a result of this analysis. Comments within the text should not be construed as specific recommendations to buy or sell securities. Individuals should consult with their broker and personal financial advisors before engaging in any trading activities. We are not registered brokers or advisors. Certain statements included herein may constitute "forward-looking statements" with the meaning of certain securities legislative measures. Such forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause the actual results, performance or achievements of the above mentioned companies, and / or industry results, to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Do your own due diligence.

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