 What
post is gold hitched to?
David Petch
December 17, 2004
I first want to state the AMEX
Gold BUGS Index is still in the running correction. Refer to
this
thread to follow the "You are HERE" charts"
to see the running correction highlighted well over one year
ago.
There are numerous little observations
to confirm the count is accurate and will continue to follow
the pattern with indiscreet waves that are impossible to predict
along the path. The recent impulsive wave completed in early
October had an extended fifth wave, suggesting a decline below
200 would not occur (it did not). The true bottom of the HUI
is at 35 and not 60. To confirm this, the recent impulse just
mentioned fell short of 258 and would have been a failed wave
[5}. This would imply a decline all the way back down to 35.
This is not going to happen. The US dollar is still on course
to 78-80. I am not going to list the counts. Instead, an editorial
is presented to discuss what gold is hitched to.
Jim Dines once said gold was
the hitch of everything in the Universe (I hope I got that right).
This editorial portion is simply going to examine charts and
present a case for why gold is bullish. I am not going to look
at oil, since the one chart presented three weeks ago clearly
shows a hyperinflationary blow off. The currency and gold case
for this will be presented. Note: all charts shown below
are from www.thechartstore.com.
The chart below shows the PPI
since 1948. The decline since 1984 has been in a declining channel.
Recently the PPI broke out of the channel. This occurrence is
a sign of inflation that soon will be passed on to the consumer.
The first major inflationary spike in the PPI in 1975 occurred
5 years before gold spiked. This is so typical of human behaviour.
A large ground breaking event is needed to arouse the awareness
of the masses. Once a larger increase in inflation is felt, that
will be the trigger for gold. A spike up, and down is likely,
followed by a gradual decline. Based upon modeling, 2010-2012
will see the price of gold go parabolic. The price of gold will
rise nicely over the next 6 years, but the blow-off phase where
the major profits are made lies around the time frame described.
Figure 1
The chart below shows the 10
year US Treasury Index (green) and total credit market debt/GDP
ratio (orange). The orange chart is clearly on an "S"
curve or a sigmoidal trajectory. The credit is likely to take
a pattern similar to the one shown in light green. The upper
portion in credit will be where the hyperinflation of commodities
will occur, along with the final low of the US dollar. The US
could fix a gold standard to their currency at this point that
would remove inflation, since currency expansion will be limited
to their gold holdings. Deflation is likely to occur at this
point around 2012-2014 with a brutal 3-5 year bear market. There
is likely going to be a bounce at that point. Time considerations
are shortened as a hyperinflationary environment develops. Implications
for the S&P with the above scenario are not good. Peak oil
is soon approaching, so going that far out is difficult. It also
is likely that in a global shortage of commodities, no currency
could be gold backed, because certain countries that are resource
based like Canada could take a significant amount of gold off
the market in trade. The US is a major importer of oil, so their
gold would likely be removed from their coffers. What scenario
takes place? I am leaning on the latter presented. The US may
have a quasi-gold backed currency and keep their currency backed
by gold, but may not exchange it for goods.. I do not believe
they could trade gold, since they are net exporters. China and
Asia are building factories, so they will have the reigns for
global markets. I think owning bullion even after it tops out
will be important, because wars could start and certain currencies
could fall worthless. Gold and silver however will not lose their
value.
Figure 2
The price of gold since 1889
is shown below. I consider the price of gold up until 1933 as
part of a prior pattern. The USD was fixed to gold before, so
inflation was minimal. Since the initial decoupling in 1933,
the monetary expansion has been phenomenal. This is where I would
start the fractal pattern for gold. All fractals start and all
fractals end and the current pattern is wave (V) of supercycle
degree for gold. The blow-off in gold is going to be huge and
since the move will be logarithmic, the best profits lie 6-8
years from now. The inflation line could have been drawn at 1933,
but the 1971 point is where gold was totally de-coupled from
the USD. Once a top is in, money should be used to buy items
such as land, or staple companies, since their prices will likely
be low.
Figure 3
The chart below shows gold
and the CPI index. Gold appears to have put in a cup and handle
formation shown below, with an immediate projection to $600 USD/ounce
(The Captain pointed this out last week I believe). Comparisons
with a few charts ago illustrate that CPI lags PPI. The major
peak in PPI in the coming years will likely occur 2-3 years before
the major CPI spike. The final rise of inflation seen in the
CPI will likely coincide with gold. This is another indicator
that will be useful for gauging when a top in gold will occur.
The coming top in gold (2010-2013) will be driven by a supply
shortage of unseen magnitude coupled to high inflation. This
combination bodes to make the price of go to levels never thought
possible.
Figure 4
The long-term US dollar chart
is shown below. The 160 top fell 50% to 80 and then rose 50%
to 120. If this trend continues, then 50% of 120 is 60. The decline
is likely to follow the path shown below. The gold bull market
is going to occur in all currencies due to reasons mentioned
above. I think the future currencies will be prices to the value
of gold rather than fixed to the USD price. A declining USD creates
higher pricing on imported goods. This is why I expect the US
to try and form an economic union (for now) with Mexico and Canada.
These countries are commodity based and the US needs access to
them without paying a higher price due to currency fluctuations.
Figure 5
Below shows the USD as a function
of value in Canadian dollars. The red line shows the base, which
is slightly below parity. Given the huge overshoot, it is likely
to go further to the downside to 0.9. This will absolutely put
the brakes on the Canadian economy, causing the government to
lower interest rates to attempt currency devaluation. This translates
into a longer real estate boom in Canada that will end in tragedy.
I did mention previously that higher interest rates are on the
way. This is for the US and will be followed in Canada at a later
date. Currently, interest rates in Canada are likely to decline
for the next 1-2 years.
Figure 6
In closing, I hope the above
has illustrated why gold is going higher. Since gold was detached
from the US dollar, it has not been hitched to a post, so it
should and will keep rising as currencies are expanded. Relatively
speaking, gold has been in a bear market until 3 years ago and
has major moves ahead to make up for the currency expansion.
If anyone is interested in our market analysis of the AMEX Gold
BUGS Index, US Dollar, S&P500, AMEX Oil Index and the 10-Year
US Treasury Index, check us out. I am just listening to a Bing
Crosby and Frank Sinatra Christmas CD. Music of today is not
anywhere near the quality that existed in earlier years, much
like TV.
written December 12, 2004
David Petch
Treasure Chests
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