Is Gold Poised To Surprise?
Below is excerpted commentary that originally appeared at Treasure Chests for the benefit of subscribers on Thursday, January 18th, 2007.
Gold and silver are pushing higher. In spite of this however, precious metals shares continue to lag, as investors anticipate the rally to be temporal. This means the precious metal share to metals ratios are not pushing higher, characteristically signaling an end to the rally is neigh. What's worse, it appears investors are bound and determined to break precious metals shares down, as evidenced by the fact ratios are on key 'triangle related support'. Who needs gold stocks right? The twisted (double) logic that rationalizes ignoring and minimizing the sector at this point goes something like 'not that a rising stock market represent inflation or anything, but since it's already up substantially, I wouldn't want to buy any gold stocks because a falling stock market would be deflationary.' Here, many investors who would ordinarily be buying precious metals shares are not doing so because of perceived rising risk as the larger equity complex continues to bubble. It stands to reason then if the stock market continues to push higher, the potential for a violet adjustment higher is possible. In this respect, if Gann's 'mirror theory' has any merit, then time lines shown on this chart, along with a Fibonacci resonance related projection, suggest stocks could surprise a lot of people over the next six-months.
And there are more reasons coming out of the woodwork all the time to bring one to the conclusion stocks should fall this year, some based on good observation, and some not. As an example of this, and as you know from our discussions on the subject, the Decennial Pattern is suggestive 2007, being a year ending in '7', should be down, and potentially big time since the market's performance last year was robust. Did you know that from a Presidential Cycle perspective however that third year's in a term are historically prone to rise in similar fashion to last year's performance, potentially countering negative Decennial Pattern influences. Be that as it may however, as per above, based on the continued funk in the metals many think a Democratically controlled Congress could be big trouble, taking money out of the hands of already cash strapped consumers, and causing inflation measures to wane. Furthermore, deficit reducing tax and spend policy (as opposed to borrow and spend) characteristic of a Democratic led House is perceived to be especially 'bad for gold' in particular, as the currency will in theory not be debased as quickly. Boy - are these people in for a surprise.
Correspondingly then, this is where officialdom will get caught eventually, as no matter what lies are spun regarding true inflation rates in the interim, fundamental constraints will eventually play on commodity prices, where future indications will surprise to the upside. And we shouldn't have to wait long for this when one realizes as pointed out earlier in the week, authorities are already inflating phantom money supply and debt, which is now noticeably spilling over into visible measures. Of course authorities will continue to baffle peoples brain with BS, where no matter how opposite in reality, inflation prospects will be minimized. The real story concerning producer prices is a good example of this, where in fact the current picture being painted in key Producer Price Index measures (Finished Goods) is the trend higher has topped, deflecting off a sinusoidal extreme in December. Who needs to buy gold if this is true, right? (See Figure 1)
And if that's not bad enough, take a gander at this measure (seen below), Crude Nonfood Materials Less Energy, a more recent cocktail added to the menu designed to minimize the big picture, which has been well controlled for the most part with weakness in crude oil taking pressure off of wider measures, as per above. What's more, it also hides what price mangers know they have a growing problem with now, that being worsening drought and other unusual weather conditions, where if it were not for weak energies at present, painting the same larger picture would be impossible. As it stands today though, if core measures of inflation are the ones that are important, price managers appear to have things well in hand, if not in reality, at least in reporting. (See Figure 2)
As mentioned however, once true fundamentals join up with a better sentiment picture in the energies, which is now taking hold, it will be very difficult to hide the inflation, no matter who controls Congress. Add to this the economy is stronger than expected right now, which could keep both interest rates and the dollar ($) high in the States, and we could have a period of concurrent rising gold to go along with that cocktail once a better inflation related reality sinks in with investors. You may remember from previous instances, this is when precious metals can have a serious catch-up move.
Of course we will need to see crude oil to turn around for real (now occurring), which could continue to prove a challenging task considering price managers have such a large vested interest in keeping a lid on things for as long as they can. And this is especially true if rumors of the US going into Iran in coming days are true, which would be sure to send oil prices propelling higher. In the meantime however, cheating cartel members could unknowingly conspire to aid price managers, which is apparent in the oil market's inability to rally.
This is a key factor we are keeping our eye on right now. When is the turn in crude oil coming and under what context? While nobody knows for certain, one thing is for sure. If the Middle East invasion / war spreads to Iran, this would not only be inflationary from the perspective commodity prices should head higher, what's more, don't forget about the fact Da Boyz back home will have justification for opening monetary spigots wider, which will not hurt visible money supply growth rates any. What's more, if this were to occur, along with the price increases that would inevitably follow, it would be difficult for even those who believe in fairy tales (mainstream inflation data) to ignore reality for long with crude back at the highs quickly.
In relation to our opening remarks then, this is when gold could surprise nay Sayers, nullifying potentially false messages currently being thrown off by key ratios in the sector. And who knows, maybe even officialdom would be surprised by such a move given they go to such great efforts to fool the public. You know what they say however; 'you can't fool all the people all the time.' And eventually, 'all chickens come home to roost.'
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Good investing all.