The Kings We Make
No one, and no thing can control a (liquid) market forever, especially that of money. Reflect on this; what would be the point of a market then?
Still, it's not just a matter of markets forcefully rallying through official supply. It means beating them at their own game. Beating them to the punch on both the buy, and sell side. Taking the market away from them if you will. Reducing them to providing liquidity to the market. In most markets there are bulls, bears, and there are pigs. But also, there are Lions.
In the diamond business the Lion is De Beers. In the semiconductor chip market it's Intel... and so on. In the money business - which includes gold, currencies, and interest rates - the central banks roar loudest. They are the kings of the golden jungle, if only so long as they are either feared or ignored.
They cannot control the way people value goods. They may be able to control supply to a large extent, but they can only influence or estimate demand. This applies to the currency as well as gold.
I'm going to summarize our outlook for the gold sector today, and where we are relative to it at the moment.
In early December we made the argument that gold stock investors ought to scale back some of their aggressive long positions to cash themselves up for a correction. Boy, did we get it. From everywhere, as if I were a gold bear or something. Wrong.
I only have this to say. Those that cashed up can afford to shop today.
I'm in the business of selling outlooks - mine. They may not be money, but heck, I promise you they're better suited than the reserve currency is.
I can hear them already - "shouldn't there be laws against this (selling opinions)?"
It doesn't matter who they are, just that the laws ensure they are the only ones doing it! Right? This is the nature of it all, in my opinion. It's how you build a cartel.
Friends of the Earth has a slogan that says rights for people, rules for big business. If only they knew the laws never level the playing field quite like they think. Or maybe they do. Who funds them anyway? Some cartel or another??
Maybe the gold industry should fund them. It would be a better investment for the WGC than jewelry. Imagine how high gold prices would go if they got their way. Don't get me wrong. I love mother earth. It's not the miners they should be after though. They're not the ones hooking everyone else on more money. This is the source of the demand for gold after all. In an economy where the money was sound, commodity prices would fall - more gold wouldn't be necessary. Greed for it might exist, but not to the same extent as it has in the 20th century.
Unfortunately, we didn't cash up. We shorted the S&P!
The darn thing keeps on chuggin'... whatever that means right? It's no surprise though, since the central bank of the United States is doing everything it can to keep rates below market, and most investors today can't seem to tell the difference between real profit and, well, more money.
Where that'll change is when the Fed can no longer keep rates below market, and labor unions figure out how they're getting shafted.
Anyone know why wages rose even as unemployment grew in the seventies? No, it wasn't just labor trends and laws. It was a collapsing currency, and the impact of it reverberating through all prices. The geniuses called it stagflation, but that's only if they couldn't explain it through Keynes' framework.
The point is, the currency is today falling, the cost of living is rising, sharply in some regions, and most people haven't quite figured out yet that it's a rather permanent feature of this economy. This is despite the fact that our technology today allows us to look at a graph of prices going back more than 100 years, which all but proves it.
Don't get mad at me for being hard on the masses, just because concepts like central banking are really our own fault - they wouldn't exist if people didn't want them to.
Unless someone is going to argue that the currency is actually not in a constant state of devaluation, they cannot consistently disagree that interest rates are below market. And if we apply the simple rules of supply and demand to money and credit, it's obvious that keeping rates below the market is not an easy thing to sustain... except to the extent the market is kept in the dark about the nature of it all.
But even then, even if people were all truly blessed with lifetime ignorance, all it would mean is that they wouldn't understand their actions. It wouldn't mean cartels could control what they want.
I love stocks by the way. I don't have a problem with paper just because I'm a gold bull. I just don't like more paper, or need more money. More wealth is good. I don't expect everyone to understand that because most everyone thinks they need more money.
They don't. If they did, they'd cash in their bank deposits, stocks, and so on, and hoard it. Money is only one expression of wealth. Others are money substitutes, fiduciary media, savings and term deposits, chequing deposits, real estate, mutual funds, etc. Money is only the common medium of exchange. Understand this, and nobody will ever fool you again.
Current Target = $475, Long Term Target = $2690
Should we buy gold and/or gold shares today?
If one does not own any, absolutely, go crazy. They're both cheap compared to where they're going to be in a few years. And it's always less expensive to buy weakness in a bull market.
I think they're a good short term trade here too (see further below). But beyond this coming bounce, my view is much more neutral for 2004. I believe there could be new highs in gold shares during the first quarter yet for two reasons: a) I'm bullish on gold prices for new highs, and b) while the risk to a broad market rollover still remains, it has diminished somewhat since gold stocks fell first and fastest - which gives gold shares more room to run during the initial stages of a general market downturn.
But after that I'm less certain until after the election is out of the way... for whatever it's worth. It shouldn't matter much to long term investors because it's only the medium term that's cloudy.
(Our subscribers may find this commentary repetitive, or a convenient summary.)
Putting aside the why's and wherefor's here, my perception of where we are is that we're encroaching upon the end of the second or third inning of the ball game - in gold's bull market. Overall, gold bulls are well ahead so far despite the recent setback that you all knew was coming.
Technically, it became a bull market when the break out through the 1999 high during 2002/2003 from what many interpret as a six year double bottom resulted in the most bullish sequence on the long term chart in over 20 years (copper prices broke out of a similar pattern just last year, which also spanned 6 years by the way). Soon after, we reversed a 15 year downtrend at the $355 to $360 handle. Then last month the bulls took out the 1996 high, and printed new 15-year highs to kick off the New Year.
The bulls' current challenge is to conquer bearish resistance at $420 to $428. It would be a fatal blow to the bearish case, and it would leave only one remaining obstacle to clear before the whole world piles in - the $500 ceiling that bulls failed to push past in 1983 and 1987 (I don't count going over it for a month before halving a success).
Gold experienced an intermediate correction in 2003 from February to August. But the last correction to the primary sequence occurred over an 18-month span beginning after the 1999 bullish spike, and ending in the first quarter of 2001, several months before the US dollar would first peak. Since then the corrections have been intermediate.
Hence, the current bullish primary sequence has run for almost three years now.
It is just about the longest and strongest such leg since the last great bull market ended in 1980. The 1993-96 leg was equal in length, but only half in extent of gain. On the other hand, the 1985-87 rally was shorter in time, but outperformed the extent of the current gain by a margin.
The technical objective of the current primary bull sequence can be measured in at least two independent ways.
First, by measuring the size of the possible six year double bottom (see chart) top to bottom we get a figure of $425 as the potential target. Hence, we could say that the objective of that breakout has already been met (this is a standard way of inferring upside or downside from a pattern - done on a log chart).
Second, by measuring the size of the seven month triangle - intermediate consolidation - that ended in August we get a figure of about $460 as the objective of that breakout. I prefer this latter target for two reasons, a) it comes from a more recent pattern, and b) since I believe it's a bull market, I expect the current move to outperform the 1985-87 run, which means a minimum $450 target price. Gold $425 was our initial target for this primary sequence, but we raised it in the third quarter of 2003 for these reasons.
Moreover, our new targets, if met, would be enough to confirm the breakout through resistance at the 1996 high of $420 (the bar has been raised to $428 now due to recent action. In other words, a higher high here would in my opinion confirm it) and signal to a wider audience that the bull market has begun.
I believe this breakout to be the object of the current primary sequence. Maybe we'll even go right through $500 and never look back. But I doubt it. I think I'd be injecting some hope in my analysis there. The bulls have taken over three important resistance points held by the bears during this three-year run.
A rest is due once they've finished taking $428, and $450 that is.
The reason is that I think we've reached a threshold of sorts - probably confirmed by the noise around the G7 and central bank gold agreement recently - where the next significant move up in gold is likely deadly for the establishment, because it would result in new all time lows in the US dollar index, and ultimately upend the bond (recent trends noted).
I'm not a believer that an uptrend in interest rates alone is enough to quell a gold bull like this one, but it might be enough to give it pause because it's been one heck of a long time since interest rates have gone anywhere but down.
Let me reiterate some of the other reasons we're expecting a timeout some time in 2004, related to the above:
- the great unknown - interest rate derivatives (but not deflation!)
- the administration must and will do everything in its power to prevent the above sequence of events leading to an interest rate shock during election year - or else, it'll likely cost the election; they'd be naive to avoid targetting gold in this sense
- the new central bank agreement on gold is slated for renewal this year, and is likely to draw lots of bearish supply rhetoric from the sector's Lions
- technical trends in gold and the dollar are maturing relative to historic tendencies for such legs
- if the Dow resumes a bear market, gold shares are less likely to be the source of enthusiasm and leadership to bullion they have proved to be so far
But by 2005, all of these obstacles will probably have dissipated.
I am hesitant to forecast any sort of geopolitical calamity for obvious reasons, but will suggest that it is probably not in the interests of America's enemies to orchestrate an attack this close to the election... the reason being that it might guarantee George Bush's second term, which we have to assume they are aware.
Hence, at the moment, my outlook is that a new primary sequence in gold's bull market will have begun after the election.
Our ultimate bull market target is $2690, gasp, but I'm not willing to look out beyond one year or so for a prognosis. We'll just have to keep you up to date on that one or two years at a time. I've been bullish on gold since at least 1999. This past few months is the first time in that period that a correction to the primary sequence has infiltrated the scope of my mental radar.
Now, for the short term.
Bullish, bullish, and bullish. Well, that's how I've felt since last week, as you know.
Treasury, Fed Comments to Result in Lower USD
The gold sector is ready to bounce. The market's current focus is on the outcome of the weekend's G7 meeting, which some people expected would result in a coordinated currency intervention of some kind to prop up the weak US dollar.
What's the point if the central bank keeps printing off fresh notes?
Anyway, here's the official statement:
"Excess volatility and disorderly movements in exchange rates are undesirable for economic growth." G7 Communiqué, 08 Feb 2004
What an epiphany. It means nothing though. It's the same regurgitated statement I've heard come out of these meetings before and it's as ambiguous as the FOMC statement.
As I mentioned in a subscriber letter last week, the noise emanating from central banks around the world just prior to the meeting was aimed at bringing the Treasury into the intervention fold. Hence, the market was looking for confirmation from the American side. I concluded that it would be more bearish for the dollar longer term if the Treasury joined the chorus since it would contradict the implied confidence from past statements like, free markets should determine currencies.
John Snow, the Secretary of the US Treasury, added a few words himself after the G7:
U.S. Treasury Secretary John Snow said on Monday that global currency values should be set in competitive markets, but the possibility of intervening to affect values could never be ruled out. Speaking to reporters after addressing a group of Cuban-Americans in Miami, Snow, repeating a frequent phrase on foreign exchange, said "a strong dollar was in the America's interest." However, he also said foreign exchange "interventions should be kept to a minimum, but we never say never, either." - Reuters, Feb 9
Now this is more like it. Increase the level of ambiguity, why don't they. We shouldn't, but if we might, only a little, since we never say never? A strong money is in everyone's interest. But it's not gonna' get strong through intervention.
In any case, we take it as a sign that there is probably preparation underway to defend the US dollar. Perhaps the subtle shift in the FOMC bias in January was a baby step in that direction also - I'm sure that Easy Al is cognizant of the meaning of gold's bull run despite what he says in public, and whether his fellow board members are.
The only thing that could possibly be holding the Fed back from raising interest rates is the uncertainty of its impact on stock and bond values. Remember, stocks are trading at rich multiples, and foreigners have been buying bonds hand over fist.
Similarly, the subtle shift in tone by Snow this weekend may be indicating a baby step by Treasury - to test the market and satisfy its allies without at the same time admitting to the market that the dollar needs support... since so far the market is under the impression that the weak dollar is deliberated.
The bottom line, neither the Fed nor Treasury would prefer to intervene (openly that is), but they will if they are left with no choice. Their statements suggest we are not there yet, but would be if gold rose further, or the dollar fell much further.
The reason the US dollar bounced at the end of January was because it was oversold, and some shorts were scared off by the campaign for intervention. These things having been corrected, the US dollar should resume its bludgeoning drop. Gold prices already seem to be anticipating it. I can't imagine anything that the ECB or BOJ can do alone that isn't different from what they've already been doing so far, and our targets for the dollar are still lower in any case.
Gold stocks have fallen enough that a downturn in the Dow is less relevant now, and could even push them higher. I just can't know how the short term will exactly play out, but I think the right bet is to be bullish on the gold sector for the near and long term, and sideways in the medium term.
Our favorite choices are Newmont, Harmony, Gold Fields, Randgold, IAMgold, Coeur D'Alene and Kinross. We're looking for a 20 percent rally in the gold shares as gold breaks out to new highs and nails our current targets starting this week.