Bin Laden, Gold, and the US Dollar...
A couple of people have written to me wondering what effect the latest Bin Laden video threat may have on the gold market.
One of my favourite video clips is the one where Bin Laden and his bespectacled Number 2, Zawahiri, are shown sauntering along in the hills with the aid of sticks, and we are supposed to believe that this pair of wandering eccentrics are somehow a grave threat to the United States. The notion is laughable and ludicrous - yet millions of gullible citizens believe it. Many readers may recall the absurd "Duct Tape" episode, which was the cause of considerable mirth in other countries. Millions of Americans rushed to their local DIY stores to buy masking tape to tape up the gaps in their doors and windows after a government warning of a possible chemical or germ warfare attack. It just goes to show that you can get the majority of citizens to believe anything or do anything. So another video of Bin Laden making threats has been wheeled out and aired - so what? It won't make any real difference to the gold market, apart from perhaps a short-term blip due to the fact that so many supposedly intelligent people suck this stuff up.
What gold and gold stock investors should right now be much more concerned about is the immediate outlook for the US dollar. It is true that gold's fortunes have to a considerable degree become decoupled from the dollar in recent months, and we have paid homage to gold's achievement by no longer including an assessment of the dollar in the regular Gold Market updates (although it may later be included again), but gold can never completely escape the shackles of the dollar in the foreseeable future, for the obvious reason that it is priced in dollars. Therefore, if the dollar rallies strongly, it will continue to be a negative for gold.
Let's now take a look at a 1-year chart for the dollar index to see how it's shaping up. As we can see there has been a substantial reaction by the dollar since mid-November, and it is partly this that has fuelled gold's strong rise. However, this decline has resulted in it being quite deeply oversold and brought it down into a zone of significant support, where it appears to be forming a potential small base area. The reaction has also brought it back close to the still rising 200-day moving average - normally a classic buy spot, as the larger trend must be assumed to be up while this indicator continues to rise. Thus, it looks like a significant rally by the dollar is on the cards, and if it occurs, it can be expected to precipitate the gold share correction written about yesterday. That said, the overall dollar chart is weakening, with the November high not much above the July high, and looking further ahead, the outlook is for a serious dollar retreat.
To end on a positive note, the influence of China on the gold market is far more interesting and significant than any of Bin Laden's antics. The Chinese have an instinctive appreciation of gold as real money that is admirable and indicates a basic common sense sadly lacking elsewhere, and it extends from persons of the highest rank right down to the man in the street. China is a fast growing economy and is set to become a world power, with 1,400 million citizens whose collective buying power will be mind-boggling. What does not denote so much common sense on the part of the Chinese is the embarrassingly large mountain of paper assets and IOU's accumulated over the years as a result of trade deficits, especially with the United States. It is like having an attic full of old newspapers - the thing to do is to get rid of them, and that is what the Chinese are quietly doing, which is why they are furtively buying hard assets - commodities - especially gold, real estate and mines etc. It is hard to imagine gold, whose value lies in scarcity, doing anything other than going up against most world currencies, the supply of which is infinite, although here we should end by pointing out that the US Federal Reserve has redefined the definition of infinite.