Friday, September 24, 2010

$1300 Gold at the "End" of the Great Recession

Apparently, the Great Recession is now over (though Warren Buffet - for one - disagrees). At least the end of it seems to fit as far as the technical definition of “recession” goes. I remain unconvinced that we won’t slip back into a “double-dip”, but no one knows, so I’ll wait and see.

Meanwhile,
silver and gold continue to rise. $1300 is the next target level for gold, though it is currently overbought and due for a $50-$80 correction, in my opinion. Then it might be time to buy some more.

Personally, I hope the recent rapid rise of the rare metal slows and retracts somewhat. It is starting to stray far away from the 200-day moving average. As you know, for myself it is a basic investing tenet that the further any item moves above or below the 200-day MA the sharper and more violent will be the snapback toward that average when the item finally does correct (as everything does in the yin-yang dance of the markets).

No one has been more anti-gold in recent decades than Alan Greenspan. So, when he said last week that
“Fiat currency has no place to go but gold,” I was shocked. I had to research that a bit more just to make sure it wasn’t some wild internet rumor. It sounds completely un-Greenspan-like. Though he favored the gold standard back in 1966, of late Sir Alan is a poster boy for fiat currency. If he thinks the validity of fiat money, as a whole, is somehow questionable in comparison with gold then what we have is nothing less than a paradigm shift.

The funny thing is when I researched the quote I discovered no one carried it. The media largely ignored this fundamentally rather profound statement, even if it did come from nothing more than an email that Greenspan sent to
David Malpass of Encimaglobal . Nothing in The New York Times. Nothing in The Wall Street Journal. Nothing on CNN or even CNBC. Nothing on youtube. Nothing almost everywhere.


Did Alan Greenspan manage to speak at a gathering of economic advisors and no major news outlet bother to even video or report on the event?

The email reference was quoted in The Motley Fool. Resource Investor. The Forbes Blog. Gold Seek. Arabian Investor. Some other blogs. And The New York Sun. 'Dats it. Really bizarre that it got so little coverage. The New York Sun editorialized, in part, about this ominous silence amidst the significance two days ago.

Richard Russell recently observed: "
The Gulf oil powers are preparing to launch a single currency modeled on the euro. Saudi Arabia, Kuwait, Bahrain and Qatar are set to start next year on their new Gulf currency. These four nations (total GDP of $1.2 trillion) are set to start trading with each other with their new currency. And it looks as though they will establish a new competitive central bank.

"I've thought for a long while that China was sick of taking losses on its holdings of US securities including its huge hoard of Treasuries. China, I'm convinced, wants to own the world's reserve's currency. China has already announced that it will shortly make its yuan convertible. But more than that, China has established arrangements to use the yuan with some of its main trading partners including nations in Asia and South America. Their business will not be done in dollars, it will be done with Chinese yuans. Further, China has become the world's leading producer of gold. China has been urging its population to build up their personal holdings of gold. The Chinese government is no exception. China has been switching its longer-term Treasuries to T-bills, and moreover, China is adding an increasing amount of gold to its reserves."

I think Americans have no clue about what is slowly happening to the 100-plus year reign of the absolutely-based-on-nothing dollar. This is beyond any president's or political system's ability to remedy. Economics always trumps politics. Always.

In terms of Dow Theory, the recent action of the markets has led to two recent, small but possibly significant non-confirmations. Since the Dow Theory Bull confirmation on July 26 (see July 27 post) the market has basically been locked in a trading range. Not going anywhere. The Dow rose to 10,698.75 on August 9. It then bettered that high with a rise to 10,761.03 on Tuesday, September 23. Then today the Dow closed at 10,860.26, a new high for the rally. This has led some to claim that another "buy" signal is imminent.

But, with Dow Theory the Transportation Index is always factored in equal proportion. All confirmations are both the Dow and the Transports move in unison. All non-confirmations are when they move in opposite directions or not at the same pace for short-term milestones.


So, what has happened lately? Well, the Transports confirmed the Dow on July 26 by closing at 4482.09. They then rose to a rally high of 4516.32 on August 9, again matching the performance of the Dow. After that, however, the Transports also went into meander mode.
Importantly, when the Dow went to a new high on Tuesday, the Transports did not confirm this action. They failed to confirm by 5 points. Today the Transports did not better their August 9 high. They did not follow the lead of the Dow. They came up short by one point.

In the world of Dow Theory everything is black and white. It is not horseshoes; there is no "close." There is no gray. You either confirm or you don’t.
This non-confirmation calls the Bull into question. We will have to wait and see if the rally continues but Dow Theory casts doubt as of tonight. Still, the July 26 indicator of a Bullish primary trend remains in effect pending a counter-confirmation.

But with the Bullish trend called into question, the continued strength in gold, the continuing economic issues, the ever-rising mountain of debt, and unemployment still high, I can’t help but consider Alan Greenspan’s comments about fiat currency and gold in an amplified fashion.

Maybe I’m blowing this out of proportion. But, as you know by now, I am not a fan of money for nothing (fiat). I am not a fan of the Federal Reserve System. I happen to believe the entire financial underpinnings of our country are unconstitutional.


Perhaps a big change is coming. Not immediately, of course. Not dramatically in the sense of time, but certainly full of drama in the sense of the nature of the change. Certainly, something we haven’t seen since the US went off the gold standard in 1971.


Greenspan has flip-flopped, at least temporarily, on the validity of gold versus fiat money. Larger trading partners of the US are moving away from the dollar. At the moment, gold is rising not because of fears of inflation so much as the emergence of a larger question about the legitimacy of the fiat concept. Interesting times.

The only clear bull market trend is in gold, not in stocks (which seems murky at best). That's the way I remain positioned. We'll see if this a mistake on my part. Every decision short of digging a hole and putting the money in the ground is fraught with risk. But, I like my chances long-term with what is still pretty much a stealth bull market. (Disclosure: I own GLD, SLV, and NEM along with my bullion holdings. The rest is in various cash positions.)

Late Note: The following Tuesday, 9/28, both the Industrials and the Transports closed at new highs for the rally. A bullish sign. According to Dow Theory, the market is likely to continue upward. Gold moved to a record $1310 per ounce. Everything is overbought.

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