The Dow-Gold Crossover, Part Two

By: Alex Wallenwein | Sat, Feb 19, 2005
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Ignition ... when?

Yes, I know. There were a couple of mis-firings on the way. So what? Getting a gold-shuttle up into orbit isn't that easy, after all. At least, it didn't blow up like Challenger did in 1986.

But a powerful sign of either an imminent lift-off (or a new gold-attack) is occurring right now. In the first Dow-Gold Crossover article I predicted a time, not far off, where the Dow and gold - which have trended together from mid-2003 until Early January 2005 - will part ways. (by the way, if you're still not convinced that gold and the Dow have become buddies - and the Dow and dollar enemies - of late, please consider this chart):

When the Dow starts falling off, but gold continues its inexorable upward trend, all kinds of hell will break loose.

And it looks like that's about to start happening.

During a few weeks, from January 19th until February 6th or so, the 20-month old dollar-Dow inversion appeared to have dissolved itself. Yesterday, the Dow officially went back into the red zone for the year (which it hasn't really left but for a brief moment) while the dollar continues to resume its fall.

Naturally, as the dollar resumed its descent, gold resumed its only briefly stalled upward momentum. This appears to be turning into the long-awaited Dow-Gold Crossover. (In the process, another Euro vs Dollar Monitor prediction from January came true: the short-term dollar-bounce/gold-droop resolved itself before the end of February, 2005).

What will happen now will show how much 'oomph' is left in the old US/Fed economic consortium.

Greenspan has not indicated that faster rate rises are on the horizon. Continued quarter-point hikes until the end of the year are already priced into the dollar. His bit about the current account deficit self-correcting as a result of "market forces" hasn't convinced anybody, so the dollar is back in decline and gold back in rising mode.

If the Dow now joins the dollar on its downward journey, it will be exceedingly difficult to trash gold. Therefore, if gold is successfully trashed to keep investors fixated on the Dow while the dollar is falling, then there is quite a bit of moxie left in that old paper-engine.

If gold keeps on rising, on the other hand, but the Dow keeps falling, then we're very near the end of the "Miracle on 20th and C Street" (the address of the Federal Reserve building in DC).

Why would the Dow keep falling?

Because Al "the Green Goblin" Greenspan has miscalculated somewhat - but that's understandable, given how many lies the guy has to keep spinning at the same time. It gets confusing after awhile.

True to form, just about at the time when his continuous rate rises were showing some bite and were promising to prop up the falling dollar enough to forestall a world-wide headlong flight into alternative currencies, the Dow started turning south.

Take a look at the period from December 31st to mid-January on this chart:

Then, from mid-January until early February, gold fell while the Dow and the dollar rose together - briefly. That's okay with the US establishment. But now, with the dollar still falling, the Dow is having a hick-up while the anti-dollar contingent (gold and the euro) are slowly rising again.

The very short time frame does not really allow any serious prognostications as to a sustained major gold rise in the short term. But when you include the XAU gold stock index in this analysis, then we get quite a different picture - as gold stocks have often acted as a lead-indicator for COMEX gold. (Interesting to note here is the February 4th time slot on this chart. It looks like the dollar, gold, and the XAU [the hot-pink line] changed directions within a day of each other, while the Dow briefly continued its uptrend.)

At that point, the dollar resumed its downward path, gold began to slowly climb, and the XAU shot up like a bat out of hell. All the while, the Dow kept on rising back to its December 31st level, which it only reached a few days ago - before falling again.

Right now, the dollar-Dow down move in the face of a gold/XAU up-move is only two days old, but there are fundamental developments that indicate this may well continue.

Only two days ago, the Green Goblin has said that inflation and inflationary expectations were "well anchored". Today, February 18, 2005, we find that the PPI shows a significant up-tick in core producer prices during January, to the tune of 0.8 percent. That's a whopper for just one month - and a nice little glove slapped in the goblin's face - courtesy of the market.

Of course, real consumer price inflation has been strong for some time as Jim Puplava showed in several of his last expositions. But now, that PPI increase - since it is likely to continue - will soon trickle down to even official representations of consumer price levels. Either that, or companies will be afraid to pass it on - and their profit margins will shrink.

That doesn't bode well for the Dow.

Higher inflation means rising interest rates, which means tighter money, which means higher debt payments for individuals and businesses, which means lower profit margins all around ... which is of course bad for stocks.

On top of that, when higher inflation causes faster rate increases is will tend to boost the dollar which is NOT in the US establishment's interest since it is bad for the Dow. (See the top chart).

Real bad.

But here is the problem: Greenspan has shown in his last two speeches before Congress that he is afraid of faster rate rises. He played the likelihood of those down by emphasizing how "low" inflation supposedly is. Now the PPI-jump is forcing his hand - either way, causing him to stick his foot right up his mouth. (Pretty agile for an old man, isn't he?)

Either he raises rates (and therefore chokes the economy off) faster, or he keeps his "measured" pace and the dollar goes back into free-fall mode - as it is already wont to do despite his series of rate hikes since June last year. Neither contingency is in his play book, so he is in a bit of a tight spot here.

In short: The sorcerer's apprentice is watching the broomsticks carry bucket after bucket of water into the den. But this particular apprentice's main problem is: The sorcerer ain't comin' home!

He's dead - if there ever was a "chief sorcerer" out there. Our Goblin himself is now chief magician 'extraordinaire' - and none greater has ever lived, according to the press. There's no one to turn to but God himself - but God has been systematically excluded from all of the establishment's magnificent calculations.

So, it looks like "all systems go" for the (possibly final) Dow-Gold Crossover.

If the Dow turns down while gold (and especially the gold stocks) move up for any length of time, an eventual stampede out of stocks and into gold-related investments is inevitable - and that is exactly what the establishment is afraid of.

With inflation up, bonds will fall and long term rates will rise, making debt payments more expensive, houses more expensive, and all of this is bad for the Dow ... yada, yada, yada. We've talked about it all ad nauseum in previous essays.

Now, it seems it's about to happen.

I hope you've bought lots of 'physical' on gold's way down from $455 to $410. If not, this would be a good time - before the COMEX' decoy gold price goes over $500 this year, and then beyond. (Isn't it wonderful that you can actually buy real metal at these phony prices??!)

Got gold?


Author: Alex Wallenwein

Alex Wallenwein
Editor, Publisher
The Euro vs Dollar Monitor

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