The Wave of the Future
There was some exciting market action this month. Aside from oil reaching a record high, the action in gold was even more significant.
For the first time in years, gold moved up nicely and so did the U.S. dollar. Gold rose $25 in June, reaching a three month high and even though it's recently been declining, it remains bullish. More important, it also hit 11 and 13 year highs against the euro and Japanese yen. Why is this significant?
Gold & Dollar: Don't always move opposite
Gold and the dollar have almost always moved in opposite directions. The weak dollar kept upward pressure on gold and that's certainly been the case in recent years. But gold is now rising on its own, not simply because of the dollar. It's going its own way and this is bullish action.
As we've often said, once gold starts rising against all the currencies, it'll be important because the bull market will be moving into a different phase and that's currently happening. This tells us the smart money is now buying gold as an alternative to paper currencies. And with gold hitting new highs in other currencies, it's also looking good to international investors, especially now that few currencies are attractive.
What are the choices? Even though the U.S. dollar is rising, the fundamentals have not changed. The deficits keep getting bigger and the U.S. is the largest debtor nation in the world. Europe's future is uncertain, Japan is wrestling with deflation pressures, Britain is slowing... and these are the world's biggest currencies.
So what's an investor to do? Increasingly they're turning to gold, which is real money and it has been for thousands of years. Gold is emerging as an attractive investment category and the mega trend we've been discussing, out of paper assets like stocks and into hard assets like gold, is starting to become more noticeable. This is the big picture and we believe this will continue as time goes on.
Taking a longer-term view of gold versus the euro and yen, you can see how impressive these new highs are (see Chart 1). Falling confidence in the euro, and the resulting weakness in several currencies was the reason for the gold rise, but that doesn't diminish the fact that gold is in a solid uptrend and it's headed higher.
This is impressive action because gold is now behaving like the ultimate currency. This isn't surprising since none of the paper currencies are backed by strong fundamentals. Plus, no paper currency in history has stood the test of time like gold has. As Greenspan said years ago, "In the absence of a gold standard, there is no safe store of value." And compared to what's happening in the world of paper currencies, gold is indeed looking good. So it's no wonder that gold is rising as an alternative. The ultimate currency of the world is now starting to shine.
Tangible Assets: Best place for your money
Look no further than gold compared to stocks and you'll see what we mean (see Chart 2). The mega trend changed three years ago when the ratio rose above this very long-term moving average. This means gold is stronger than stocks, it's the better investment and since these trends don't change often, that'll likely continue in the years ahead.
This month reinforced this change as oil shot up to a record high, while copper, uranium and platinum all rose to new highs. Even the grains are on the rise, not to mention the ongoing housing boom.
We all know that growing world demand and tight supply for oil, copper, uranium and the resource commodities has been keeping prices up, especially with China and India's added demand. But India is also the world's biggest buyer of gold and China is following in their footsteps because the government has been urging its citizens to buy gold. And with the rise in living standards in both China and India, this demand for gold and commodities will keep growing.
One thing is clear. The major trends are up for gold, oil, silver, copper, platinum and uranium among others, and as long as that's the case prices are going higher. Some believe the bull markets have reached maturity and declines are due. This may be but we'll keep our eyes on the major trends and stay invested as long as they remain up.
One Step at a Time
We've been taking this bull market in gold one step at a time and so far the steps are in place. As Chart 3 shows, gold tends to fluctuate in major 1-4 movements. The #1 rises have been the best bull market rises since the 1970s. And gold's been in a major #1 rise since 2001. It's also been above its 65-week moving average since then, which provides major bullish support at $417.
Gold moved up into the third step last December when it reached a 16 year high where it's been holding since then. The lower side of the third step is the 1990 and 1996 highs near $420 and $415, respectively, which happen to coincide with the 65-week moving average.
So it'll now be important to see if gold continues to hold above these levels. If so, its next target will be the upper side of the third step at $500. This could happen later this year but once gold surpasses $500, it could explode upward to the $850 peak.
On the other hand, if gold has a set back, we believe it will be temporary.