Gleaning The Cube
Fasten your seat-belts, as it appears gold's currency related 'ratio box', which has been inhibiting real gains in the metal across the full spectrum global fiat regimes, is about to come unglued. Are things about to change in this regard? There is a body of evidence to suggest this is indeed the case, not the least of which has been gold's recent performance against the box. Times are a changing.
Does this mean a flood of demand, from a global perspective, is about to rush into the precious metals complex? That's the way I read it, as gold's recent strength has done much to punch some pretty sizeable holes in gold's 'ratio box.' Gold is now rising against most paper currencies in absolute terms, and through time, appears poised to encompass even the laggards in a meaningful fashion. And although there's still a technical hurdle or two that needs to be overcome by a few of the measures, which may take more time to fully develop, the importance of this is not to be taken lightly, if you are concerned about preserving your hard earned wealth, because what you are witnessing is a trend, and in all likelihood a long-term trend, with profound implications lasting well into the future. Ignore them at your own peril.
Have you noticed that gold is not going down? Many investors believe gold is destined to go down soon, and they can't understand why it keeps rising, and the USD Index (USD) falling. Some information services are prognosticating that the Bush Administration is engineering a lower dollar to aid in their political agenda, after all, the government is assumed to be in complete control of the economy and markets these days, tinkering with this and tinkering with that to ensure the USS America comes in on an even glide path going into the election year in 2004.
And then there's the Fed, and Alan Greenspan, who is the head of the most powerful central bank in the world, if measured by the numbers of dollars it has and continues to set afloat in the ocean of global/foreign currency reserves, continuing to come in around 70 % of the pool, or there about. And although this feat may be viewed as a victory to Mr. Greenspan and company, especially considering everything still seems to be running quite smooth to most, what is actually happening behind the scenes is the 'knowledgeable', those who understand what is really happening out there, are literally 'fleeing' the USD in any way they can now, in favor of anything that is not a US dollar, because they realize it is completely devoid of any rational measure of wealth or value.
Let me give you an example of a paper against paper measure, that is the USD against the stock market, to begin showing you what I mean. Therein, it's certainly no mystery that stocks enjoyed a stellar year in 2004, with the S&P 500 (SPX) up over 20 % and the Nasdaq (Comp) up just shy of 50 %, and still climbing relentlessly. The media, which must wrongly explain everything for us to justify their existence, attribute this healthy condition to the improving economy, or whatever else they can come up with on a particular day.
The investing populace, not completely unaware of the ravages currently being perpetuated on their wealth via holding dollars have seen fit to escape the decay by putting their hard earned money into stocks, which has done much to prevent an erosion of their wealth, and has in fact been quite profitable. (See Figure 1)
As you can see above, when put against the broad measure of stocks in the US, holding dollars in this manner has been a good method of preserving one's wealth, and goes a long way in explaining the strength in domestic markets this past year. Here's where it gets interesting however, as it is difficult to categorize what has happened in this regard as a 'panic' to date, because over the past several months stock prices have been rising on decreasing relative volume. (See Figure 2)
How can this be? Simple, nobody is selling because when you do, one receives dollars in exchange, and nobody wants more pieces of worthless paper to confiscate their wealth through the depreciation process this currency unit must continue to endure because of the imbalances authorities have now manufactured.
And, based on the fact monetary aggregates were contracting in the fall, but have recently turned higher once again, the real 'panic' out of the USD has probably not even occurred yet, where one can now expect increasing quantities of debt induced fiat attempting to find a reasonable home away from dollars to push not only stocks higher, but of course 'tangibles' also, which has in fact been the primary trend for several years now, spawning new bull markets within this spectrum as well.
With what appears to be the bottoming of a short-term credit cycle in December, as evidenced in a renewed expansion of monetary aggregates in the US, price mangers may have finally fully released 'Pandora's Box' in the formula, where most participants will not mind the ride up at first, but may not be so enthusiastic about what happens in 'Weimar Republic' type circumstances latter on. For now though, we are likely to see more and more investors begin to participate in the euphoria most will not even consciously embrace, driving both paper based and tangible equity groups across the board higher in a frenzied fashion, and expanding the mania into commodities, not the least of which affected will be precious metals (PM's). Just take a look at gold against the USD, which is mounting a breakout from its current growth channel into sinusoidal amplitude gyrations. (See Figure 3)
The implications of such an event are quite profound as it pertains to the linear progressions gold has made against it's currency related 'ratio box' to date, where participants have not only fled the USD into stocks and commodities, but into other fiat currencies as well, with gold's relative performance largely contained to the percentage changes in foreign fiat against the dollar, creating much confusion amongst PM investors, and limiting participation because of the mixed signals being emitted. Perhaps the best example in this regard is gold as measured in the South African Rand, where until very recently gold has actually been depreciating against this currency unit, largely because of a high interest rate policy imposed by the banking community that had the effect of sending it into orbit. It appears this trend has likely exhausted itself for now however, so with the combination of buoyant USD gold prices and a falling Rand, gold in South Africa (SA) is poised to enjoy a concurrent double benefit at the same time, producing potentially explosive and exponential gains against comparative counter-measures, acting as a magnet once the true force of the trend becomes evident to larger percentages on the investing public. (See Figure 4)
The effects of this new intermediate-term trend will likely also proliferate renewed up-trends in SA gold stocks, which over the past year have severely under-performed their counter-parts, and where gold denominated in other currencies benefited from the idiosyncrasies of predominant 'ratio box' constraints, creating an over all undervalued situation in this group. Within the group of SA gold stocks some have faired much better than others, again because of idiosyncrasies that exist on a comparative basis within this measure. The larger capitalization stocks, simply by virtue of their risk profiles have in actuality held their respective price levels relatively well against a depreciating local gold price, while the smaller-caps have generally suffered quite considerably, given the marginal and more risky nature of their operations. Perhaps the most well known in this regard is Durban Roodeport Deep (DROOY: Nasdaq), which although possessing significant resources in the ground, are not largely economic at current Rand gold prices, accounting for its dismal performance since the beginning of 2003. (See Figure 5)
But, as you can see from the above, things may soon change in this regard, as it appears DROOY is ready to begin discounting significantly higher local currency gold prices into the formula via a breakout from the descending and contracting triangle denoted. And if you think the above triangle looks attractive from an investment standpoint, which would involve a holding one would want to 'own' for the long-term, take a look at this next triangle Durban is sporting, which is significantly longer-term in duration. (See Figure 6)
Now I've seen a few charts over the years, but never, I mean never, have I seen a better-looking chart than that of Durban Roodeport Deep (DROOY) presently. On a very basic technical level, above and beyond the bullish triangle present, there are two very important things you should notice about the above. First, the longer a stock bases, the bigger the move once underway. And second, one should take note of volume, as it generally precedes price, and in this case is signaling a move higher. So if you think DROOY's move up from half a buck over the past couple of years was something, you are really going to like what you see over the next five to ten years, as the measured move indicated above is in all likelihood just for starters, with a basic Fibonacci projection putting the stock a minimum of 62% above previous highs in the ~ $50 area, which would be ~ $81 if you don't have a calculator handy.
And when one looks at DROOY against gold, you get a better idea of the value you are getting in the current price range, an absolute steal in my opinion, as on a time related basis, as indicated below, it's due for a move soon. (See Figure 7)
As much as I would like to spend more time on the South African situation, as in addition to DROOY many others in the group also represent excellent value presently, we must now move on, as there is further evidence gold's currency related 'ratio box' is about to be blown apart, characterized by exponential gains for PM's across the full spectrum of global fiat regimes, as found in their respective relationships to other commodities. Indeed, just a cursory glance at silver's more recent performance for example, with it's prospective gains into the future far superior to that of gold's, indicates the PM complex as a whole is picking up steam, and ready to blow at any anytime. (See Figure 8)
Further to this observation, below you find a chart that clearly depicts how PM's are now anticipating substantially higher commodity prices ahead, with silver's increasing gains against the group now just taking hold in the initial stages of a bull move. (i.e. Note I could have just as easily used gold in the last example.) (See Figure 9)
Narrowing in on platinum now, as it historically has worked as a leading indicator for PM's, as well as a comparative barometer as to where respective prices should reside, one can easily observe the price inflation that characteristically follows rapid currency inflation, as investors flee local fiat in search of anything that will not disappear in a puff of smoke because of an unforeseen accident. (See Figure 10)
And it appears there must be quite a problem in this regard out there, as the chart of gold against platinum is ready to make a bull move of it's own, which of course signals a self reinforcing process of continued appreciation for both tangibles at this point. (See Figure 11)
Although it is not evident in the above because of the limited time utilized, gold's historic long-term average ratio relationship against platinum is considerably higher than current levels, up in the .60 to .70 range, with spikes well in excess of .80 at the extreme. One should note that even the lower end of this historic relationship puts gold in the ~ $480 area (~ 800 x .60), which then makes this level quite reasonable near-term considering the bullish disposition of the above chart. And if that's not enough for you, take a peek at platinum against the USD, to get an idea of the pace market players are running away from this fiat currency unit in favor of the safety found in tangible assets. (See Figure 12)
Now you may be wondering why I am showing you all these commodity based charts, when the main focus of this excursus was suppose to deal with gold's currency related 'ratio box'. Well, although it may not be readily apparent to you, as the box (i.e. relative USD/foreign currency ratios) has primarily defined the extent of gold's movements in the bull market to date, this condition is likely to change in the not too distant future, as evidenced by PM's respective relationships against commodities. In fact, I am probably not reaching to far in stating it is the relative attractiveness of tangibles against paper, as all foreign currencies are primarily paper, with little or no gold backing, that is likely to keep a relatively firm bid in PM's no matter how various fiat regimes trade going forward, as growing numbers will seek to flee all things paper as time passes.
If the charts above have any predictive capabilities in signaling when this should begin to occur in earnest, the time appears to be now, given the bullish disposition PM's currently enjoy against commodities as a whole. And if there is a single understanding one should take away from the findings in the above, it is that growing numbers of global citizens will soon seek the safety of PM's as an escape from the ravages unscrupulous middlemen engender on their paper representations, where the words 'excessive' and 'manic' do not form part of their vocabularies, guaranteeing increasingly destructive corrective episodes as future cycles exhaust themselves.
So if you were wondering why gold and silver remain strong in spite of previously establish harmonic rhythms, the above may be of help in deciding whether to hold or fold your cards as it pertains to your PM investments, as based on the very limited participation of the population in the group to date, perhaps the term 'ownership' should become a very important word in your vocabulary, and not so much the words 'buy' and 'sell'. How one arrives at his or her definition of owning PM's is based on personal preference and comfort levels, whether it be via paper proxy or the hard asset. No matter how you go about it, one thing is for sure, possessing some of the real and true 'global currencies', being gold and silver, appears to be a must these days given the rush hasn't even begun yet.
Good investing to all.