Gold and the Global Bombing Index
With the first three-and-a-half months of 2006 behind us, now would be a good time to look back and reflect on some of the head-spinning events that have already transpired in what is turning out to be a bloody, violent year. But before we get into the financial and economic considerations (including gold), let's take a look at the socio-political events that have been dominant thus far.
If one had to summarize the two most dominant things of the year-to-date in only one or two words, I'd venture that the following words would best apply: "democracy" and "bombs." The former because of the obvious rush to spread democratic forms of government to developing regions of the globe. The latter because it seems to be an all-too-common accompaniment of the spread of democracy, especially in the early phases of implementation. That is, countries that have been targeted by the world rulers for takeover and democratization are first subject to relentless bombing/warfare campaigns before they can eventually reap the "rewards" of having a democratic form of government.
Put another way, we might say that democracy is brought into a country on the back of bombs. To this end it will come as no surprise that year 2006 has seen more than its fair share of bombings, particularly in the world's political hot spots. Earlier this year I became so alarmed at the almost daily news headlines announcing bombing activity in a foreign country (usually somewhere in the Middle East) that I was inspired to go back and chronicle just how many bombs have been exploded this year. Using the international version of the BBC News web site as my starting point, I searched back in their archives several months to chronicle the reported bombings in various countries each day, week and month of 2006. I've since kept a daily log of these bombing reports and will share them with you in this article. This probably is not the most comprehensive journal of bombings as some smaller-scale bombs undoubtedly are failed to be reported in the BBC news. But since BBC does an overall good job of staying on top of the significant bombings around the world I think the following log is a fairly accurate summation of the bombing trend of the past several months.
By tallying the total number of reported bombings each day beginning in January a linear trend can be easily seen in the cumulative global bombings of 2006. I've labeled this cumulative trend the "Global Bombing Index," or GBI for short, and the chart below shows the dramatic rise in the actual bombing trend year-to-date. As of mid-April there have been 129 reported bombings in various countries (mostly in the Middle East region) so far this year according to the BBC. And to think we're just over one quarter into the year!
This simple linear trend, while jaw-dropping, doesn't fully capture the internal momentum of the global bombing trend. For that we need to construct a series of rate of change oscillators to show the reversals in the bombing momentum on a short-term basis. I prefer to use the 5-day, 10-day and 20-day rate of change oscillators for this purpose of showing bombing momentum and have aptly labeled this particular chart the "Global Bombing Momentum" index.
Here you can see that when the three oscillators hit a baseline reading commensurate with previous "bottoms" in the bombing momentum trend, a reversal in momentum is soon thereafter invoked. In other words, if the momentum of the global bombings has been trending lower, when it reaches what in market parlance would be called an "oversold" reading, it eventually turns up again and the momentum of bombings around the world increases. Conversely, whenever the momentum of the bombing trend extends too far up too fast (i.e., the equivalent of an "overbought" reading in a traditional market oscillator chart).
Notice the extremely "overdone" bombing momentum reading of the March 13-20 time frame in the above chart. (This period of intensive bombing activity was begun on March 13 with a series of three bombs in Iraq killing a total of 66 people, plus another bomb in Bangladesh killing four). The green line denoting the 20-day rate of change in the bombing trend hit a peak for the year-to-date of 35. The 10-day oscillator (blue line) in similar fashion hit a peak of 22 and the 5-day oscillator (red line) also hit a peak. This meant that from the point of view of the global power brokers, the bombing trend had gone temporarily too far and would need to be "corrected" for the sake of mass psychology and public fear. Not surprisingly, the global bombing momentum turned down sharply from there and for a brief period of time there was a respite from heavy bombing activity around the world. (Not only was there a temporary lull in bombing activity at this time but there were actually several reports around the world of police and military agencies defusing bombs that might have exploded....almost as if to underscore the "peace and safety" aspect of the respite.)
Speaking of "peace and safety," I'm reminded of a passage in the Bible which states, "For when they shall say, Peace and safety; then sudden destruction cometh upon them..." The Global Bombing Index momentum oscillators seem to validate this in that whenever the oscillators reach an extremely low level commensurate with previous bottoms, the bombing trend picks back up again whenever "peace and safety" seem to be at a maximum.
Now what are the implications of the GBI for the price of gold? In the past it can be seen that whenever the three rate of change oscillators for global bombing are falling and hit an extreme low, the price of gold and especially of gold stocks in the aggregate (as measured by the XAU index) peak and pull back for a time. But once the GBI momentum oscillators turn up and starting moving higher the gold stocks as a group eventually follow suit. Why should this be? It is because gold, and to some extent gold stocks, are reflections of widespread fear among other things and when the bombing trend is up on a global scale it has the effect of pushing up gold and gold stock prices as investors rush to safety. Gold and gold stocks fit this description in the minds of most investors, hence the tendency for gold/gold stock prices to benefit whenever the GBI momentum trend is up, and conversely, to suffer temporary setbacks when GBI momentum is at a low ebb.
With the recent upward surge in bombings around the world it is no surprise that gold recent hit a new high for the year on April 17, nor for that matter that many actively traded gold stocks have benefited from this resurgence of fear and violence. This is an unfortunate fact of the financial markets, namely that certain asset prices tend to benefit from political turmoil and violence, but one that should never be forgotten. The Global Bombing Index keeps us aware of what is happening in the world's political hot spots and informs us when the precious metals sector is likely to react to the violence that seems to be increasing with each passing month.