The New Deal
When faced with both deteriorating fiscal and monetary conditions due to the exhaustion of supportive long-wave forces in the 1930's, Franklin Delano Roosevelt (FDR) brought about what was dubbed the 'New Deal', where for the first time in the history of the Untied States of America, the outright 'socialization' of the 'system' was deemed a necessary evil in order to maintain economic stability. An accompanying facet of the New Deal, which was deemed necessary because of the 'national emergency' that existed at the time, was of course the 'gold confiscation' declared on April 5th, 1933, where by act of Congress US citizenry were denied the right to possess fungible gold outside of legal tender already in circulation. Needless to say, we can only hope something similar does not transpire in any modern day 'new deals' as it pertains to gold, and that both it's true intrinsic value and fundamental role as an inflation hedge are brought back into proper alignment at some point soon. One thing is for sure, it would certainly paint a bizarre picture if the Chinese populous is able to hold gold and Americans were denied this right, so don't expect see any confiscation deals States side any time soon, no matter how bad things get.
This of course is not to say authorities will not continue endeavoring to influence the gold price however, as it always has and will always be a political metal. In order to understanding of why central authorities continue to attempt managing the price of gold, one must first examine the big picture as it pertains to the structure of the global economy, and how it has matured post World War II, with the United States (US) acting as the center piece. Within this time frame, and continuing into today, the human condition has never experienced such a ubiquitously prosperous period in its history, with the 'free world's' crowning achievements from a politico perspective marked by the fall of the 'iron curtain', and China's integration into the global market economy. By the same token, one has wonder about a growing irony in the current situation however, where by all accounts economies based on central thinking are fundamentally doomed from the outset, but where current trends in the so called 'free world' are approaching disproportionate measures in this regard. (See Table 1)Table 1
Source: Michael Hodges
Further to gaining an adequate understanding of current US domestic circumstances, it is important to note the percentage of public debt to Gross National Product (GNP) in the States took off with a vengeance under the Reagan Administration, punctuated by a brief reprieve while the Democrats under Clinton were in the driver's seat, such that we are now at a comparable historical juncture to the 1930's. Here is an enlightening picture pertaining to the above that highlights some key considerations as to what may transpire in the absence of further justification for an expansionary deficit / debt policy stance in the US, where the projected drop in government spending that would result in the opposite case is primary to thoughts of deflation, and where it appears only an accelerating war / spending agenda can now counter such a development materially. (See Figure 2)Figure 2
Source: Michael Hodges
Complicating the issue, a comparison of current US domestic circumstances to that of the 30's and 40's appears somewhat more dangerous than just the prospects of an increasingly war prone environment, because at the time of Roosevelt's 'New Deal', and not to mention we operate in a considerably more complex global scene these days, further socialization of the domestic economy will soon take us over the half-way mark. Considering tertiary sectors are undoubtedly more than marginally dependent on both direct and related (spin-off) spending associated with a comparatively bloated public sector, which of course puts the measure well over the half-way mark in total effect, it would be easy to argue the US of today is no better of than its European or Japanese counterparts, and that if stimulative influences are not accelerated, the global economy could fall into a depression. (See Figure 3)Figure 3
Source: Bull and Bear Wise
Knowing of this tenuous circumstance, and based on the belief no matter which political party wins in the November US Presidential Election, it is difficult to envision any degree of voluntary fiscal and / or monetary restraint on the part of authorities moving forward. Why you may ask? In very basic terms, the current global economic system would collapse due to the lack of organic growth prospects, which is evidenced by the need for a continued 'socialization' of the 'weak links' that appear to be growing both in terms of scope and severity. One could go further in terms of comparisons between current circumstances to that of the Roosevelt Era, or should we say the lack thereof, involving topics such as demographics and debt related issues. But, for our purposes, the above should provide you with a sufficient understanding of exactly 'why' authorities continue endeavoring to manage the price of gold, as in their eyes, if gold were to begin an accelerated advance at some point, efforts in applying the 'fiat solution' would be hampered as governments are forced to act in a responsible manner. (See Figure 4)Figure 4
Source: Bull and Bear Wise
It's not difficult to understand why investors, including many informed participants, continue to view a 'loss of control scenario' regarding official efforts to manage gold effectively with a degree of cynicism, considering the 'US modeled banking society' continues to extend influence into every corner of the planet, and has done an excellent job of maintaining price stability with a little help from their friends. The understanding promoted here is based on belief that new participants, like the old, are happy and willing to measure relative economic health against a 'fiat box', which as you probably know, is benchmarked utilizing the US Dollar (USD). This of course allows all participants to print fiat currency, effectively expanding money supply to bolster economies lacking in organic growth potential on a continuing basis, and where exchange rates between counterparts adjust to relative rates of debasement. Therein, as long as the price of gold remains low, officials can debase their currencies unabated, because no clear sign organic growth potential has been exhausted is emitted. And, the longer such policies are maintained, more meaningful adjustments that must last far longer will eventually ensue, which is why governments and bankers continue to go full out in avoiding even a hint of recession, considering the growing socialized nature of the global economy. If such a wide spread and non-regenerative condition was perceived to be failing by market(s) participants, rapid adjustments could result, which is in fact likely what we are witnessing at present with a plunging USD. (See Figure 5)Figure 5
Internationally, non-US investors must be looking at what is happening to the USD and realizing if conditions in the States are deteriorating rapidly, their economies cannot be too far behind given American's are viewed as the consumers of last resort, and that local authorities will be compelled to 'inflate or die' as well. This is why foreign investors are likely to be increasingly less willing in allowing central officials to confiscate their wealth in the future, evidenced by gold's currency related 'ratio box' appearing to be on the verge of coming unglued (see above), and which will likely entail accelerating absolute gains in the metal's price against a full spectrum of key currencies. There is good reason to believe this advent will be heavily influence by demand for physical gold on the part of foreigners, where the majority of US investors still prefer speculation in gold derivatives, a practice which is in fact self-defeating given central authorities have proven their willingness to introduce ever-increasing amounts paper-based supply into the mix. As you can see below however, and considering implications associated with Figure 4, central banks may find it increasingly difficult to influence the price of gold in a restrictive fashion very soon, especially if accumulating gold reserves was forced upon parties suffering from violent and damaging currency swings. At this point there should be little doubt left in your mind a growing gap in the market driven physical demand / supply equation could necessitate a rapid adjustment in the price of gold at any time. (See Figure 6)Figure 6
Source: World Gold Council
Given this circumstance set, the question then arises, "Is there technical evidence in the charts gold is preparing to break out its current grinding / base building pattern in response to changing dynamics within the interplay between rising physical demand and US modeled paper pricing machinations?" We believe there is.
And with paper gold pricing mechanisms remaining the primary method of keeping a lid on the rate of ascent, where both controlling markets and governance reside in the US, a very big message would be sent to the rest of the world if gold prices began to rise on an accelerating basis, which again, could come at any time. (See Figure 7)Figure 7
It may be of interest for you to know gold has now been trading at an average price of just under $419 (London PM Fix) for the month of October, with the previous monthly average high for the move thus far being $413.99 in January of this year. So you see, gold is slowly breaking out against the USD, making the prospects of real gains in other currencies more probable in the balance. Looking ahead, if the current rate of ascent continues at the same pace, November could yield an average of $425 by simply continuing this grinding pattern higher. And better yet, from a technical standpoint there is good reason to believe the current grinding pattern could be ready to transition into a period of increasing volatility with a meaningful break above the $425 mark, where a significant 'buy signal' would be triggered with a three-day close above $433 spot, the double-top definer. (See Figure 8)Figure 8
One should take notice the kind of price action that has taken place thus far in the current rally sequence is not a 'flash in the pan' variety, but 'base building', eventually wearing out the bears in the market, and effectively swinging a greater degree of pricing influence over to physical off-take considerations (i.e. long-term investment demand) within the interplay involving speculative paper related pricing mechanisms. Further to this, with an average gold price greater than $400 for more than 200 trading days now, from an interval related perspective, the next logical target becomes $500. Not surprisingly, there is inter-market related evidence to suggest this price range could be attained quite rapidly, as it appears a great deal of pressure is building in the pipe, where if the valve is not opened soon, it will blow even higher eventually. (See Figure 9)Figure 9
Certainly its no secret commodity prices have been moving higher for quite some time now, lead by oil, which on top of expressing demand / supply considerations in pricing terms, have been feeling the effects monetary largess. The chart below defining technical conditions in oil is suggestive crude may be close to putting in a top, but the Elliott Wave Theory (EWT) count suggests it should be relatively short-term in nature, as the progression is advancing in successive five wave affairs. (See Figure 10)Figure 10
Some investors will become bearish on precious metals when they perceive a top of potentially intermediate-term duration has developed in oil, and in fact, any selling associated with this occurrence will likely lead to some degree of weakness in the metals and their related equities, providing astute investors with yet another opportunity to accumulate on the dip. I say 'astute' investors because these are the individuals who will have taken the time to do their homework, like you here today, and they know the metals will probably have precious little downside associated within this scenario, as evidenced by the impending breakout of gold against the commodities complex shown in Figure 9. Why would this occur? On a basic level, as this is only one factor, general liquidity conditions would improve as a result of lower commodity prices, as measured by MZM (Money at Zero Maturity), which is defined as liquid cash that is spread out amongst all the M's. (See Figure 11)Figure 11
Source: Bull and Bear Wise
Further to this, one must remember 'price inflation' is a product of 'monetary inflation', where the higher prices you see in commodities today are a result of the ongoing currency debasement agendas authorities instituted to spur growth. In addition to knowing mature economies around the world will have a propensity to print fiat currency in regular fashion from our discussions above, one should also realize there are times when the rates at which this largess is released into the system will be higher than others, and it pays to do your homework in order to keep tabs on when these times are upon us. Based on the technical condition in the chart below, where this key relationship to the above appears ready to breakout, now, might just be one of these times. (See Figure 12)Figure 12
Source: Bull and Bear Wise
As you can see above, it appears the US is about to embark on an accelerated debasement agenda, characterized by the release of copious amounts of fiat currency relative to the base of semi-liquid measures into the system. And, based on an assumption the rate of debasement in the world's 'reserve fiat currency' will probably exceed its counter-parties for a period, where some market participants will actually adopt a candor of 'fleeing' this depreciating measure of relative economic health, it's not a stretch to consider the possibility a USD crash may be in the works, undoubtedly stimulating investors desire to preserve their wealth visa vie gold, along with other markets within the precious metals complex.
Coming full circle in terms of the objective behind this exercise then, it appears there is sufficient evidence to conclude the USD is entering a period of relatively rapid depreciation, where gold, a re-emerging primary alternative outside of the fiat box, will begin to regain its historic role as a hedge in this regard on an accelerating basis. If there is one message we would like you take away from the totality of the understandings found here today, its that accumulating gold under the circumstances outlined above is not a speculative endeavor, as no 'new deals' are about to come along to magically put a fix into the situation. Indeed, at some point in the future, owning gold will likely be perceived as a 'necessity' to the masses, taking prices far higher than one can imagine today. For this reason, one best get on board in a meaningful fashion soon, lest you desire watching your hard earned wealth disappear in an accelerating inflationary spiral.
If you are interested in participating in the burgeoning precious metals bull market in a value conscious and well-researched manner, we at Treasure Chests can aid you in this process. Remember, it pays to do your homework.
Until we meet again.