What's Bugging Gold-Bugs?

By: Alex Wallenwein | Tue, May 10, 2005
Print Email

What's wrong with this picture?

A train pulls into the station. There are a bunch of gold bugs riding it, waiting for it to take them to "them thar mountains" where the gold nuggets are so plentiful they are rolling off the hills like rubble.

The train pulls in - but it doesn't pull out. Some kind of technical trouble. Gold bugs get restless. They want it to keep moving. When the train doesn't comply with their wishes instantly, they get off and stand around the platform, discussing what went wrong - again - this time.

Meanwhile, while the bugs are engaged in their heated debates, finely-clad mainstream folks with their iguana-leather briefcases and satellite cell phones are seen swarming the platform and are boarding the train. The conductor yells, the whistle blows, doors slam shut, and gold bugs are standing on the platform scratching their heads.

Why does this keep happening?

With all the doom and gloom over gold and gold shares prices in recent weeks and months, it seems to have escaped gold investors that mainstream press writers are beginning to jump on the gold train - while most of the bugs are still on the platform.

I have an idea why that is so, but we're not going to belabor the point here. This article will spell out why the mainstream sharks are smelling blood now and are jumping aboard the gold train. Of course, anybody has the right to follow them.

The dollar, after "stabilizing" somewhat this year, is about to resume its downtrend. Jim Turk already pointed it out, others have observed the same thing but are too timid to make the bullish call without equivocation. Although it broke out of its downtrend channel just a bit recently, the dollar keeps bumping its head along the "ice-ceiling" established by a horizontal line going back to the early 2004 double-bottom.

Double bottoms are supposed to signal uptrends, and there surely was one right afterwards, but it didn't last that long (although it was just long enough to depress gold bugs - again).

By August-September of last year, gravity reasserted its pull on the dollar and this time it broke through the sheet of ice, dipped into the freezing water, and came back up for air - except that the ice sheet now blocks its ascent. (Better find that hole in the ice again, quick!)

This is what it looks like (please look at the green line for the dollar. The red line representing gold speaks for itself):

Only one word describes that situation:

Trapped!

So much for the charts. Charts are entertaining. Charts are fun to play with. Sometimes they are downright helpful in making a point about past behavior, but they are very poor indicators of future developments - UNLESS they serve to confirm what fundamentals are already telling us. If they do that, then charts are great.

This one is.

The dollar-strength that began, like clockwork, on the first trading day of the new year is petering out. The best proof for that: last week's over-hyped, over-hedonicized payrolls blockbuster - and how the dollar utterly failed to follow through with its post-euphoric rally.

That lack of follow-through comes despite the much ballyhooed continuous Fed rate hikes that are supposed to follow from it, despite the "strong evidence" of the powerful economy we are supposed to have in the US, despite persistent and pervasive lameness of the European markets resulting in endemic euro-weakness, despite the fact that the Chinese have suddenly completely shut up about revaluing the yuan anytime soon, and despite the pound and yen getting weaker against the dollar.

That's a lot of "despites!"

Gold itself, meanwhile, is trapped in a gorgeous wedge formation (See chart above)out of which it will surely break out - and most likely to the upside!

Then, there are silver and the shares. Both are currently outperforming gold an a daily basis. Both are (or once were, in the case of silver), lead indicators for major gold movements. (I remember reading about silver often leading gold up back in the mid to late nineties. Haven't heard much about it lately).

Then, there is a seriously lamed-out Dow that has peaked over five years ago, has teetered and tottered in 2000, fell on its knees in 2001, then broke its fall with its elbows in 2002, has since gotten up (but wasn't quite able to shake the dust from its pants) and is now precariously looking over the edge again, as if to see how far it might have to fall this time. The Dow chart from 1990 looks like the index went through the valley of the shadows of death in 2002-2003 and came out on the other side -- as a Zombie!

That's the Dow from a dollar perspective. When you look at it in terms of the euro, you can see that it never really quite got up again after its fall. Rather, it's been crawling around on hands and knees ever since, trying to find its glasses.

Then, there is "Peak Oil" peeking around the corner. Light crude fell only briefly below the $50 dollar mark and then popped right back up above its new water mark. No future drowning victims here.

Then, there is a twenty-year-plus downdraft in long bond yields and US rates in general. Considering where they are coming from, they can't go much lower - and have of course begun their new upswing already.

Then, there is the flattening yield curve that is threatening to invert - and inverted ones have this nasty tendency to presage coming recessions. Could that be why the Treasury is talking about "maybe" reissuing new 30 year bonds again after a four year hiatus? Are they trying to pump the long end of the curve up again so as to conceal what's coming from investors' eyes?

Wouldn't be the first time.

And then, there are the reasons about which gold analysts have incessantly written for at least two years now without any echo whatsoever from the financial press - just a yawning silence. But, suddenly, the press (including such formerly anti-gold notables as Times Online and Dow Jones news wire), is reporting on these reasons as if they themselves had recently discovered them.

They must have been doing a good amount of reading in the major gold-info outlets.

Among the reason stated are:

  1. An under supply of newly-mined gold.

  2. Ex-checker Gordon Brown striking out on his IMF gold sales proposal, with the US (of all countries) opposing it. (I thought we were the big gold-haters in the world. What changed?)

  3. The Washington Agreement supporting gold generally against excessive CB sales.

  4. The "real possibility" (wow, what an insight) of Asian countries buying whatever gold the EU CBs dish up.

  5. The never-ending story of the US trade deficit.

  6. Gold is a "de facto currency"(where did they get that idea, all of a sudden?) And therefore not subject to demand deficiencies caused by world wide economic slowdowns.

  7. Gold is an inflation-fighter and they can see stagflation approaching. (Really??)

  8. It's a natural hedge against the US dollar (!)

  9. It traded predominantly between $420 and $435 this year, thus setting a new price floor, which is considered a "strong buy signal." (!)

We could go on, but you get the idea.

So, what's bugging the gold bugs?

Frankly, I don't know.

Got gold?


 

Author: Alex Wallenwein

Alex Wallenwein
Editor, Publisher
The Euro vs Dollar Monitor

Just like driving your car, investing only makes sense if you can see where you are going. The Euro vs Dollar Monitor is your golden windshield wiper that removes the media's greasy film of financial misinformation from your investment outlook. Don't drive your investment vehicle without it!

Copyright © 2003-2008 Alex Wallenwein

All Images, XHTML Renderings, and Source Code Copyright © Safehaven.com