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March 06, 2006

How Would Gold React to a Pandemic?
by Clif Droke

A reader asks, "How would you expect gold to react in a bird flu pandemic? My mind boggles trying to conceive of all the variables."

This question is being asked with greater frequency by serious investors after recent reports of domestic animals in Europe and other countries being infected by the infamous avian flu. In this article we'll try to answer some of these concerns as to how a widespread outbreak would likely affect investment market, particularly the gold price.

According to a BBC News report last week, a domestic cat in Germany was found to have the deadly H5N1 strain of bird flu, the first such mammal to die in the European Union. Sweden and Romania have also reported finding the bird flu in some wild birds, a strain which it suspects could kill humans. One health official was reported as saying that bird flu was transforming from "epidemic to pandemic" proportions as the deadly strain traverses the globe.

The BBC report concluded with a statement that H5N1 does not yet pose a large-scale threat to humans. "However," the report said, "experts fear the virus could mutate and trigger a flu pandemic, potentially putting millions of human lives at risk."

This is the operative statement that isn't reflected in the report's headlines, nor in other news stories featuring similar reports of bird flu outbreaks. The headlines and opening statements are laden with fearful, almost apocalyptic warnings of a "global pandemic," yet these fears are based mainly on speculation than in observed reality.

Thus far the deadly H5N1 strain of bird flu has been found mostly in southeast Asia with 150 known cases of outbreak in humans. The fear among experts is that the flu will be carried by migrating birds to Europe and African and perhaps even to the United States by way of more indirect influences.

That bird flu or other strains of deadly disease are becoming an increasing risk in an increasingly interconnected world cannot be denied. This is one of the spillover effects of globalism, and such risks will only increase as the global economy becomes even more integrated in the next few years ahead.

But what of gold's reaction to pandemic such as bird flu? Much of the impetus behind gold's longer-term uptrend has already been discounted into its price in advance of the actual realization of such disasters. In other words, the insiders who have the luxury of foreseeing what troubles lie ahead have already taken the appropriate measures of increasing their exposure to fear-sensitive investment vehicles such as precious metals. The insiders often know in advance when and where a health-related crisis is going to descend and have already positioned themselves to profit thereby.

In the case of contagious diseases such as bird flu, the insiders can be expected of knowing already what are the chances of an actual outbreak of happening. One medium of communication among the insiders is the bi-monthly journal known as Foreign Affairs. Leading academic researchers and think tank experts convey ideas, analysis and opinions that are in turn read by the heads of the mainstream press and often reported as "news" anywhere from three months to a year after the information appears in Foreign Affairs.

Last summer, Foreign Affairs ran a series of articles on "The Next Pandemic" and how it might affect the policy and national security of various countries, including the U.S. The H5N1 virus was specifically discussed as being a potential threat and it isn't surprising therefore to see the subject showing up regularly in the press at this time. The series of articles were prefaced with these words: "Scientists have long forecast the appearance of an influenza capable of killing unimaginable numbers of people -- and avian flu has shown signs of becoming that disease." Laurie Garrett , who wrote the feature article in the July/August '05 issue of the journal entitled "The Next Pandemic?", attempted to connect the Spanish flu (which killed at least 50 million people) with avian flu since medical histories of the victims of both plagues "are disturbingly similar" according to Garrett. She warned that should another influenza pandemic occur today "most of the world would have no access to vaccine."

Do the intelligentsia therefore view a bird flu pandemic as a real possibility? The answer is obviously yes, otherwise it wouldn't be a prominent topic of discussion one of their official organs. At the very least they view the bird flu and similar epidemics as perceived public threats that will play a prominent role in the political and economic realms as well as in the dissemination of news. Therefore a discussion of "the next pandemic" is a topic worthy of our attention from an investment standpoint, regardless of whether the threat is a real or artificial one.

So how should a gold investor approach a potential bird flu or other widespread health crisis? First, by not panicking or being too hasty to draw conclusions based on a possibility that is still relatively remote. Buying or selling an investment vehicle based solely on fear is a sure recipe for failure in the financial markets. Investment decisions must be based upon one's discipline, whether technically or fundamentally based, which negates the possibility of emotion getting in the way of the buying and selling process.

That said, the fear of a major bird flu outbreak -- even if the chances of an actual pandemic are remote -- will be among the factors supporting the gold price in the next few years. Gold is a major barometer of fear and does tend to rise in value with an increase in public fear and pessimism. Now that we're only eight years away from the bottoming of the K-wave/120-year cycle we've entered the "fear stage" of this long wave cycle. The gold price tends to outperform other investments at two points along the K-wave: the first during the peak inflationary phase (a' la the 1970s). The next during the deflationary phase such as we're now in.

With the "hard down" phase of the 120-year cycle comes an increase in warfare, natural disasters and even pestilential outbreaks (the previous 120-year cycle bottom saw major epidemics of smallpox and cholera). But equally important is the widespread lingering fear that the final few years of the 120-year cycle engenders. This fear, though unwelcome to some, is actually a bolster to the price of many hard assets, including gold and silver. The "Wall of Worry" that is essential to keeping the long-term upward trend of prices intact is kept alive by fear, including fear (whether grounded in reality or not) of various pandemic threats. Gold's longer-term uptrend will most likely continue to be bolstered by such fears.

Clif Droke
ClifDroke.com

Clif Droke is the editor of the three times weekly Momentum Strategies Report newsletter, published since 1997, which covers U.S. equity markets and various stock sectors, natural resources, money supply and bank credit trends, the dollar and the U.S. economy. The forecasts are made using a unique proprietary blend of analytical methods involving internal momentum and moving average systems, as well as securities lending trends. He is also the author of numerous books, including "How to Read Chart Patterns for Greater Profits." For more information visit www.clifdroke.com.

Copyright © 2003-2008 Clif Droke

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