Gold Shuttle II: Resuming Countdown!
Please re-read our essay The Gold-Shuttle from March 31, 2004. As anticipated, it did take "months" before the actual liftoff, but that liftoff is now imminent.
Throw away your charts, and watch the event "live" on your "Euro vs Dollar TV" set. Why look at boring graphical representations when you can see the whole thing for real before your very eyes?
Charts prove very little, except for what has already happened. Charts show that trend lines are always broken and reversed - and they always show this after the fact. Fundamental analysis, on the other hand, puts your finger on the very pulse of what drives the things you see represented in charts.
The bottom-line is: fundamentals always break charts - but charts NEVER break fundamentals!
Nevertheless, charts are very popular. They give you something to look at during times of drought, when not much is happening in the world of gold prices. So, despite this diatribe, I will occasionally continue to use them to make a point here or there. But euro vs dollar analysis never relies on, and never depends on them.
So, what does our flickering TV screen reveal?
We see a nose-cone slowly rising above the highest level of smoke (the $430 line) created by the gold-shuttle's battle with the gravitational pull - the pull exerted by historically high levels of mass anti-gold indoctrination.
While in March we witnessed the rocket engines' ignition, and the belching of that very smoke all around the shuttle in its launching position, we also saw the mission aborted in mid-launch by a number of factors, not the least of which was the previous talking down of the euro by Monsieur Trichet in the East, and a talking up of the dollar by brother Al on this side of the pond.
Trichet was able to leave it at talking alone, but Uncle Al's hand over here was forced by then-rising inflation, and by the need to support the dollar (and thus keep the Dow underperforming) during the run-up to the presidential election we just passed (just a theory I have that uncle Al didn't really want Bush to get reelected).
Although a further falling dollar surely would have been in the best interest of the US (it's just about the only way left to seriously pump up the Dow these days as you can see in The Dollar: Poison for the Dow?), the voter-perceived symbolism of the engine of US economic supremacy falling off a cliff would not have supported Bush's reelection bid.
But now all of that is behind us. Bush no longer needs to worry about getting another term. He increased his winning margin over his brothers-in-arms, the Dems, by a decent clip, and "republi-cons " (neocon-Republicans with a small "r") have gained some more seats in both houses. It's time for the end-game.
The "end-game" is an end-run around the Constitution and US sovereignty via the artifice of "free trade" (the FTAA is on schedule to go into effect next year), the quasi-legalization of illegal immigrants, further draconian restrictions on financial privacy and individual liberty by "new and improved" versions of the Patriot Act, and a cradle-to-grave mental health screening and forced intervention system a la Soviet Russia, albeit couched in more Orwellian terminology (i.e., the President's 'New Freedom' Commission on Mental Health (scroll down to title). New Freedom?? Sounds like Hitler's "Arbeit Macht Frei" inscription over the entrance to the Auschwitz labor camps.
Meanwhile, the ECB has given the signal for further dollar deterioration. ECB officials are stating they are not unhappy with a rising euro for several reasons:
It helps to counter recent inflationary pressures.
It accordingly makes rate hikes unnecessary.
The biggest of all reasons: it almost nullifies recent dramatic rises in oil prices, which could have an even bigger drag on euro-area economies than the decrease in competitiveness of their exports to the US.
The euro area's dependence on exports to the US has lessened considerably over the past six months, during which time the dollar got a short breather from its rapid descent against the euro. This "quiet time" served to enable the Euroland economies to switch a good portion of their exports to Asia, and Asian countries' recent economic gains made them better able to afford such European imports.
They, in turn, focused more of their export-efforts on each other and on Europe, so that dependence on the soon-to-be-toast US consumer is lessened - and so that an eventual turn away from all dollar-support efforts won't be so painful for the world economy.
That has a great effect on the dollar-price of gold.
What's further in gold's favor is the fact that Bush won. "The markets" like it because markets never like change as the saying goes - and they didn't get any this time. This combination: a lower dollar coinciding with happy stock markets, allows the Fed and other principals in the gold-control game to throw their heads back and huff and puff a few more times to gather more air for the moment when they are finally forced underwater.
Another short-term breather was provided by the positive employment numbers posted on Friday. 337,000 new jobs "created" in October. Yippiieee! Just in time for a neocon re-election celebration - and very close to the number Bush had promised in March. What a relief! But that relief will be short-lived since only psychological. During the Bush administration, more government jobs were created than any in private business, so that private sector employment racks up a 1.3 million deficit. These job gains are mainly in the federal, state, and local government sector - and hence illusory! No government employment creates economic value. Instead, it drags.
Since stocks are momentarily on a tear again, gold can rise further without worrying about of too many headwinds from the manipulation crowd, as discussed in my last two essays. When the Dow finally turns Dow(n), expect more rabid gold-control measures, but this time they won't take because of interest rates.
What about interest rates?
Rates are still at historic lows, of course, They are moving up, but how fast and how far is anyone's guess, because there are a number of constraints on how fast and how far the Fed can afford to raise them. These constraints have been discussed in the past, but here are the highlights:
If short term rates move up too fast, they will crimp and then cripple consumer spending, and thereby the economy at large. If they move up too slowly, the dollar will fall further than even the Bush camp would like it. Good for gold, good for the Dow (at first), but bad for the economy since most raw materials will be come too expensive, leading to higher prices AND a need to raise rates - which gets us back to the first sentence in this paragraph.
If long term rates move up too fast, they will form a steep, jagged cliff against which the waves of market action will smash the US "homeowner-ship." If they move up too slowly (as in when the Fed uses its "unconventional" arsenal of tools and buys long-term treasuries outright to force rates down), then the rapidly added liquidity will drive US prices up.
The Fed's buying of long term debt will be counteracted by the currently begun wave of foreign disinvestment of US debt (which puts upward pressure on yields), forcing the Fed to buy treasury bonds at an even faster clip than it wants to. The result: a tidal wave of dollars from both at home and abroad, driving consumer prices even higher, crimping disposable income - and therefore economic growth.
But long before the disposable income squeeze shows up in the economic figures, it will show up elsewhere:
In the stock market!
If you are a 401k, IRA, 403b, or individual stock investor, you should take great care to protect your investments from the torrential downpour that is brewing right outside your window as you read these lines. The only real protection from this storm lies in gold-sheltered assets. Everything else will be like trying to stay dry in a Texas thunderstorm under one of those little paper umbrellas that grace your favorite party cocktail.
Not a good strategy!
You need to know what gold assets to buy and where, and where to put them. Helping with that is one of the "Monitor's" reasons for being.