don't actually hope to go back to the old ways of using gold coinage;
it's just that the Federal Reserve's monetary policies keep driving
us there. Or put another way; capitalism and private property are
to productivity what inflation policies are to gold demand.
if you find our point of view objectionable, disagree entirely,
and conclude we're quacks, we're ecstatic. It means the bull market
in gold is young, because, well, we were there. I know from my
own life experiences, just when I had confidence that I understood
something, I saw it in an entirely different light. In fact, I
am nobody, as in nobody knew that gold bottomed in 1999!
bull market in gold is, or was, one of the easiest calls we've ever
made, but yet, the most frustrating to communicate to anyone outside
of the choir. The writing has been on the proverbial wall ever since
1999 when the Bank of England announced it was going to auction
off its remaining gold. The reasons to be bullish on gold were so
obvious that only the most bearishly biased or inexperienced couldn't
see them. This continues to be the case today.
I suppose "I told you so"
is getting tired. How about, "Holy cow, you mean, we were right?"
(for more details on our asset model see: http://www.goldenbar.com/GBAssetModel.htm)
Ok, so we're not actually surprised,
but I thought the bears would get a kick out of it. Gold has been
in a steady but choppy ascent for two years now. The leg that began
in 2000 is technically a primary leg, and the break through $340
turns the primary sequence bullish. We're defining the primary sequence
by either one of two possible chart interpretations.
- The breakout from a five year
double bottom is the one most technicians would favor I think.
The first bottom was made in 1999; the second was made in 2001
by this analysis. The neckline is drawn horizontally through $340,
which represents the 1999 high. If this group is right in its
interpretation we should see a sharp move up to about $455.
- The 1999 bear market (new) low
culminated in the reversal of that four-year primary bear market
leg (1996-1999). The countertrend rally (marked by the Washington
Agreement buying spike) was short in duration, and its effect
was to print a lower high in the primary bearish sequence that
bears hoped would lead to lower lows. The following primary bear
leg lasted about 14 months, but the market stopped at a higher
low, and gave way to a primary bull leg that finally culminated
in a higher high in the primary sequence, such that what we have
in the chart now is a primary bullish sequence of higher lows
(Aug 1999 and Feb 2001) and higher highs (Oct 1999 and now) spanning
The prognosis of the latter sequence
is less clear than the first. The technical objective of the current
breakout of gold's 6-month congestion range is about $365, and it's
conceivable that this (two year) primary leg ends there for a while,
and turns down into a primary countertrend bear market leg. But
it's not our most likely scenario, at least not if we're right about
the dollar's immediate downside.
Bears are likely to argue that the
bear market parameters are intact at $425, or the 1996 high. They
are right that there will be resistance there. At least there should
be. But I think they are going to be wrong that their bear market
is intact. This is the first time in over 20 years that we've seen
a bullish combination of higher lows and higher highs in the primary
sequence. Whatever the immediate market prognosis is now, we are
confident this is the bull market signal we've all been waiting
All of our other technical criteria
have confirmed gold's primary bullish sequence. The CRB chart is
almost an exact replica of gold's chart in the primary cycle. There
too, last week's new five year highs could represent either the
breakout from a five year double bottom or a primary sequence of
higher lows and higher highs. To confirm a gold bull market and
a dollar bear market we said that gold would need to get through
$340, the dollar index would have to fall through July's low, and
either the CRB, oil, or the Goldman Sachs commodity index would
have to reverse their primary bear market legs. The CRB has satisfied
Oil prices are flirting with primary
bear market resistance at the moment ($31), but the Goldman Sachs
index made a new high in its intermediate sequence, which technically
reversed the bear leg that took the index down during 2001. The
index is already positioned within a primary bullish sequence. We
view it as confirmation of the CRB move, but would like to see oil
over $31 to scream bull.
For its part, the US dollar index
fell through July's low (104) on Tuesday to register a new 33-month
low and also satisfy our criteria. The fact that the breakdown so
far is marginal is of little concern to us, because our confidence
is high that gold is a leading indicator of where the dollar's going.
Dear Richard (Russell),
due respect, you're wrong; gold bugs are bullish, unfortunately
I presume. I hate to ruin a perfectly good bullish slant, but gold
bulls turned the Amex gold bugs index around last June when they
took out the 1999 high. Only, they pulled back when gold refused
to signal a bull market in kind.
The pullback was volatile, but the
bulls were able to keep the unhedged Amex Gold Bugs Index, the only
gold index to break through its 1999 highs in the first place, from
falling back below that point in the subsequent correction. So even
while gold failed to signal a bull market, the bulls maintained
a primary bull market argument in gold shares. They got ahead of
themselves, and are lagging gold today, but it's hard to argue they
aren't still ahead of gold prices.
But maybe you're correct to bring
attention to their recent underperformance nevertheless, as an indication
that sentiment is not overly bullish yet. Thank you.
The Dollar Barometer
The reasons for gold's breakout can't be pinpointed to any one development.
GATA believes the market is exploding because it has bought the
bullion/central bank short story, Blanchard believes it's exploding
because they're suing Morgan and Barrick, the beltway believes it's
exploding because of US-Iraqi tensions, James Sinclair thinks its
exploding because he's been promoting it (good work Jim, forgive
the jest), astute market watchers think it's exploding because of
a Wall Street bear market. We think it's exploding for all these
reasons to one extent or another, but by far, the main reason gold
prices are exploding is because they're forecasting a weak dollar,
perhaps a collapsing US dollar. Keep your eye on the ball.
Inflation Is A Virus
Theoretically, strong productivity advances almost always result
in increasing output per unit of labor. In the real world, while
that is true, there are other factors that corrupt both, the calculation
and the theory. The calculation is corrupted by inflation and the
theory is corrupted by gold's opponents, or the groups that are
most vested for sustaining the inflation in currency, money, and
Let me briefly explain. In a given
economy, if there were no change in money supply, any technological
improvement should result in more output, and lower prices. Thus,
the calculation output per unit of labor wouldn't capture the advance
the way it does today. In theory, labor prices would come down as
well, though in reality they are known to be sticky in that direction.
Of course, I would attribute it to
the fact that inflationism is itself so deep-rooted in our society,
and ancestry. We see it as a virus causing symptoms such as temporary
blindness, ponzi-schemitis, deflation-phobia, gambling fever, random
trading addictions, borrower's insomnia, egomanias, chronic optimism,
looter-phrenia, larcenist obesity, bubble-denial, herding behaviors,
and of course at times, total confusion. In extreme cases, confidence
in government initiatives / plans can grow.
Anyway, when you have an inflationist
monetary system like we do, this calculation essentially measures
the effectiveness of the inflation policy in sustaining profits.
I know it is difficult to imagine
an economic system where money and credit don't expand, and so,
as a consequence, we've gradually adjusted our views of inflation
to this moving train. Ok, the train analogy worked for Einstein;
maybe it can work here to explain why most people can't see the
inflation today… because maybe they've jumped on the train, if you
will. Most everyone has a vested interest in the inflation of money
and credit today. Maybe that's why investors think Japan has a deflation
problem, because the train they're on has been moving so fast.
The point is that common interpretations
of most of the economic data completely exclude the effects that
monetary variables have on the data. The Fed says that we have no
inflation because we have productivity, and it also implies that
productivity is behind the strength in the dollar. Recall that theoretically,
productivity gains translate into more goods, thus lower prices.
This also means that the value of money rises. Today's economists
might call that deflation, since they only see either inflation
or deflation when it affects the aggregate price level, or the value
Here's the conundrum. What is it
when the central bank lowers interest rates, money supply expands,
resulting in an inflation of equity valuations, and a consequent
rise in foreign demand for the financial assets denominated in that
currency? Does a rise in the value of a currency this way mean deflation?
Hah. Look, the dollar has risen for five years for this precise
reason, because it has attracted foreign currency; because nowhere
on earth could investors (think to) get the kind of bang for their
bucks as they could on Wall Street.
We aren't arguing productivity doesn't
exist or that there isn't more of it in the United States than most
anywhere else. What we've argued is that it's been overrun by the
enormity of the free banking world's inflation doctrine. The Fed
would argue that the dollar rose for the same reasons we would,
foreign investment demand, but it would argue against our charge
that inflation caused counterfeit stock market gains in the late
nineties, or at any time for that matter. In fact, as you know,
the Fed argues inflation doesn't exist at all (the Fed is the free
banking world's spokesperson and lender of last resort).
If Wall Street's bull was a bubble,
it was inflation induced, and to that extent, whatever valuations
it sustained are in the process of being reversed now.
The Fed has been stepping on the
gas pedal since the beginning of 2001 to fight off that corrective
process, and for the first time in at least 70 years, confidence
in the dollar remained strong long after Wall Street's bear market
showed up. Both of these facts are unprecedented in their own way,
but the dollar has finally begun to crumble this year under both,
economic and political pressures.
To the extent that the dollar's gains
in the nineties were the result of, or related to, the bullish but
fleeting expansion in financial values, it's overvalued. That's
a subjective assessment and it's going to stay that way until we
change our mind, or until gold, stock, and commodity prices begin
to tell another story.
Indeed, gold and commodity prices
are rising because they're anticipating dollar devaluation. That
is our main argument. And the reason our confidence in the dollar's
demise is so strong is because we believe the tools the Fed used
to prop up the dollar have been exhausted. Of course, productivity
must be around, but it has little or no bearing on this argument
at the moment. For, if Wall Street is suffering now from the backlash
of a bubble environment today, caused by inflation and marked by
overvaluation in the dollar, what is it going to suffer tomorrow
as a result of the effects on the economy of the profuse inflation
since the bear market began?
Let's put it this way. Banks like
it when credit and currency supplies expand because their balance
sheets expand in proportion. If such an expansion in monetary aggregates
occurs alongside a stable or rising value of the currency the assets
are denominated in, all the better. What lenders can't tolerate
is when the value of this currency falls, which it tends to do when
there's too much of it, or if it's too easy for too long.
The free banking world has a vested
interest in the inflation, but it can't tolerate dollar devaluation.
Inflation is "under control" when the dollar's value is manageable,
but it is out of control when the dollar devalues.
The banking system is in trouble
today, not just because it has a short position in gold, but also
because it's losing control over this wealth transfer, if you will.
In other words, because of the effects a falling dollar will have
on prices, interest rates, and thus, the value of their assets.
It's no secret that by manipulating
gold prices, one could theoretically control the inflation, or more
accurately, sustain it, for as long as they could manipulate the
gold price. The reason is that what they're really doing is manipulating
the value of the currency. Combine that with a printing press and
you own the world. By fixing the gold price, whether by clandestine
manipulation or public declaration, the policy is actually aimed
at fixing the value of the currency that is supposed to be money,
but that can come to life out of thin air. Thus, instead of a gold
standard maybe it should be called the "Thin Air Standard." Alas,
The point is that gold's opponents
are the same people that support the inflation aristocracy. There
can be no question of motive. It's as plain as day. The only people
that can't see it are those still on board the train, who find comfort
in theories of elastic money, perverted extremes of utilitarian
ideas, monetarism, government policies, and who remain unaware of
the "relative" (Mises would say subjective) nature of valuation.
To them, anything that is moving slower than the train is deflation;
anything moving faster is inflation; and anything that's moving
the same speed is simply not moving. It's absolute, not relative,
and so, when they see that the gold sector is only a fraction of
the size of the financial sector today, they ask, why on earth would
anyone care about an industry so insignificant, in proportion to
the market capitalization of say, Microsoft?
If this is your question, we aren't
going to answer it, because we want you to sweat it out yourself.
Go short gold. Believe in your conviction! You're right, the gold
sector is insignificant relative to the "inflation" in other financial
values, and even relative to other measures of industry, if you
accept the Austrian theory of malinvestment as we do, since it has
yet to be proven false.
So in Peter Lynch's style, two sentences
or less, here's why gold is beginning a bull market: Wall Street's
bull market was largely phony and the result of unsustainable easy
money dogma; the same monetary factors lending to the overvaluation
of the US dollar have been exhausted, and a decade-worth of imbalances
in the gold market are about to be unleashed on a market saturated
with dollar denominated financial assets or reserves.
We believe there has been manipulation,
but we also believe that manipulation is fruitless, at least directly,
and that it couldn't have been managed without the help of other
factors related to dollar and investment policy (the part where
they keep inflation under control). These other factors, it could
be argued, were also market driven in part. In other words, if there
were inflation, we would argue it inflated market developments that
were already under way. Whatever the actuality, what we're trying
to say is that, manipulation or not, gold prices may have still
gone down during the nineties, but the reasons for the decline were
The main thing we have to say about
Blanchard's lawsuit against JP Morgan and Barrick at the moment
is that they better have money. It's costly to pursue legal actions
as controversial as this. It would be better just to act on the
knowledge, in my view. At least it would be cheaper. But that doesn't
mean we won't root for 'em anyhow.
We don't agree with the claim that
gold would have been at $740 if prices were allowed to respond to
the natural forces of supply and demand, as the lawsuit alleges.
At least not to the extent that any coordinated manipulation could
alone have that kind of impact. To the extent that policies were
aimed at maximizing the value of the dollar, we would agree that
the forces of demand and supply weren't natural; the effects of
inflation on paper values distorted them, and we believe would have
with or without any manipulation.
However, we do agree the manipulation
existed nonetheless, and that it had some impact. Moreover, this
impact is just as bullish now as it was bearish then. If gold prices
were fixed lower than the market would have pinned them at, the
fact would simply add to the imbalances that were already accruing
to the same extent. In other words, the upside has been made larger
by the gold market suppression by whatever extent you think it was
manipulated. If we were simply greedy gold bulls, we'd send Greenspan
et al a thank you letter for all of it. But there are enormous social
consequences to the manipulation of money and credit.
Our view is that Blanchard and co
has better standing than Reg Howe, in that Reg didn't do business
with his plaintiffs directly, so they alleged he couldn't have been
hurt, and thus had no real standing. Blanchard is a large coin dealer
that's done business with both Barrick and Morgan I presume. It
also has timing on its side. The rising price of gold is going to
make it increasingly difficult for banks to hide any losses stemming
from a short position in gold, and the growing spotlight on their
accounting practices involving Enron type prepay agreements is making
the idea increasingly plausible.
The difficulty is probably going
to be the fact that Blanchard's success would set a precedent that
the court would not tolerate - almost anyone could cash in. This
is an objection that was raised in the Howe case as well.
Good luck to them. We believe they're
charges are with merit.