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THE VALUE
VIEW GOLD REPORT
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MONEYization: The global financial phenomenon of individuals and businesses moving their funds to monies in which they have the highest confidence, or money which has a higher store of faith. |
Or, Catching Up & Calming Down
Many recovered more quickly from Hurricane Wilma. Having eight days of no electricity put a bigger hole in our productive activities than expected. More than a couple weeks were required to return the human schedule to some kind of normality. Just last week I was able to say that most of the "holes" had been filled in, and progress could again be made. For that reason, this writing is in part intended to catch up. Additionally, some investors need to calm down and not allow the speculative juices now running through the markets to drive their activities.
Buying motivated by a fear of missing out on a market move has never been productive. Successful investing is built on buying low, when few want something. Such is not the case today in the Gold market. While the longer term positive outlook for Gold to rise above US$1,300 is regularly confirmed by the news, every day is not a "buying day." Some days are just "watching days."
Rarely have so many reasons coexisted at one time to motivate buyers of Gold, and the other metals. The following are a sample of the many factors that have been joined in time to give us $Gold at more than $500. No intention exists to say that any one is a particular problem, but rather that a long list of buyers have come into the Gold market in a short time span to create an over bought situation.
Investment
managers are busy window dressing their client accounts. Many
have not owned Gold in their managed accounts. Few want to send
out December statements without some exposure to the precious
metals. The calendar is helping in another manner. The investment
community starts winding down for the year in the first weeks
of December. Tax loss selling has been completed and the moneys
have been repositioned to convince clients how well their money
is being managed. In short, the period of maximum flow from this
group is now being felt in the Gold market.
Federal
Reserve watchers, not all reading the signs the same, are also
shifting to Gold. These handicappers of Fed Res policy are divided
into two groups. First, some think the Federal Reserve is close
to the end of the interest rate raising cycle. To them, lower
interest rates are just a matter of time. Such a development
would be bearish for the dollar, and makes buying Gold a good
idea. Another group reads the minutes of the FOMC and focuses
on concerns of higher inflation ahead. This latter group is motivated
by those worries to buy Gold.
CNBC
discovered Gold. When trading below US$300, we were Gold Nuts.
At $500, Gold deserves a panel discussion in the morning. That
talk certainly has created some buying by those that let CNBC
manage their portfolios. Course these discussions are fitted
in between reports on Google. Google vs. Gold, seems almost like
a title for a Japanese monster movie of times past. As long as
the investment merits of Google at recent prices are still being
discussed, Gold is a safe longer term holding. The media attention
has certainly attracted some that are afraid of missing the move.
Momentum
players have watched as the back testing of their profit matrixes
created buy signals on Gold. These traders would not touch Gold
below $400, but the move above $475 was a buy signal to these
gamblers. Understanding momentum investing is important. A momentum
investor sees four red numbers in a row at a roulette wheel as
a sure sign that red will keep coming up. Would you bet with
them?
The
nominee for Chairman of the Federal Reserve, Bernanke, will likely
be as good for Gold as the outgoing Chairman. Bernanke's
Delusion and Bernanke's Illusion will serve as foundations for
monetary policies that will likely enhance the price of $Gold.
The new Chairman will build on the view that Federal Reserve
policy has not been faulty over the past many years. Bernanke
is President Bush's gift to Gold investors. Thank you, Mr. President!
Federal
Reserve policies continue to be supportive of higher future inflation.
Higher oil prices have been monetized by the Federal Reserve.
$60 oil and higher prices for other commodities are slowly working
their way through the global economic system. The year-to-year
change in the U.S. CPI has broken out of a ten year trading range.
The Federal Reserve, though, continues to view all these developments
as exogenous factors not influenced by the policies of the central
bank. This mistake has been made before.
Gold
has demonstrated price strength in many national monies. That
development has convinced many of a new bull market in Gold on
global basis. This global Gold rally is an exciting example of
the moneyization phenomenon, where people shift to money, Gold,
in which they have a higher faith. National monies, on a global
basis, are losing value as a consequence. Another view might
be that the shift, in process since 2000, away from paper assets
to real assets has accelerated as real returns have been superior
to paper returns.
Central
banks around the world, following the lead of the Federal Reserve,
have created unprecedented amounts of liquidity over the past
decade. When that liquidity was being stored in U.S. government
and agency debt the potential to influence prices was minimal.
With the tendency to invest money away from the US. dollar, that
liquidity is pushing a broad array of prices higher. Gold, oil,
commodities, paper stocks, housing and others prices are rising
as that liquidity is now being freed from the shackle of U.S.
debt. That unleashing of liquidity may be having an inordinate
impact at the present time on Gold's price, and the prices of
U.S. equities. Such a development increases short-term price
risk without disturbing the long-term dynamics.
The
U.S. dollar has passed through a period of high relative pessimism
which has normally been associated with an overbought Gold market,
and a likelihood of a correction within the context of a longer
term bull market. This situation can be observed in first graph.
The solid line is a stochastic like measure built on the relative
ranking of the U.S. dollar versus nine major national monies.
This measure is plotted, using the right axis, as an oscillator
with 0% representing maximum pessimism and -100% as maximum optimism.
Such a plotting convention allows more ready comparison versus
the $Gold price. Line of triangles is the $Gold price, using
the left axis.
The previous major warning from this measure was this past summer when over optimism on the dollar was indicated. That condition suggested a shift toward less optimism, or more pessimism. Higher $Gold prices were expected in that situation, and higher prices did occur. At the present, while short of a maximum negative reading, the measure is suggesting that $Gold will weaken. While the U.S. dollar remains in a longer term bear market, pessimism has passed trough an extreme level which pushed Gold prices to today's higher price. Based on this measure some consolidation is likely. Too much optimism on Gold is built on too much pessimism on the dollar, in the short-term.
The attitude of the world toward the longer term prospects for the U.S. dollar remains negative. Concern here is that the dollar is now at the lower edge of the bear market channel and is likely to bounce to the upper boundary of that downward sloping channel. That development could create some short-term price consolidation in the Gold market. Longer term the growing negative view of the world toward dollar investments should support optimistic forecasts for $Gold's price. This trend toward a collective negative on the U.S. dollar can be observed in the second graph.
Each week the Federal Reserve releases data that includes holdings at the Federal Reserve of U.S. government and agency debt in accounts for foreign official institutions. This report provides the most timely data on the investment of dollars back into U.S. debt. Last week these holdings amounted to $1.5 trillion. Plotted in the second graph is the slope of a regression line on that data on foreign official institution holdings of U.S. government and agency debt. For those with a mathematical leaning, it is the "b" in y = a + bx regression line where y = holdings of U.S. debt. In short, this measure gives an indication of the trend in these holdings.
While some may have forgotten that topic from long past courses in math and statistics, the interpretation is fairly easy. If this measure is positive, foreign official institutions are still increasing their holdings of U.S. government and agency debt. If the measure is declining, becoming less positive in this case, the rate of acquisition is slowing. This plot should give us an early indication of when the selling might start. That day when global investors tire of losing money in the U.S. dollar is coming if this trend continues to deteriorate.
At present the plot remains positive. Foreign official institutions are still buying, but at a slower rate. Since the hemorrhaging of dollars by the U.S. in the form of the trade deficit continues, excess dollars are being spent or sold rather than reinvested. That tendency to shed dollars puts pressure on the dollar's value and pushes up the price of $Gold. Such a development has contributed to the recent $Gold rally, and is the foundation for the long-term dollar bear market and bull market in $Gold. However, these foreign official institutions have not started selling dollars. That action, when it develops, will be what propels $Gold to over US$1,300.
The longer term case for Gold remains well intact. Concern here is with the tactical moves of investors, or how they should deal with the daily and weekly price movements. As shown in the third chart by the oscillator at the bottom, $Gold has risen to an over bought extreme. Timing your purchases to make greater profits simply makes sense. And note, we are referring to the timing of purchases. One should not sell in a bull market.
The indicator in the $Gold graph suggests that $Gold may be preparing to start a consolidation. An overbought reading on this oscillator continues to persist. Speculative juices now running rampant will exhaust themselves at some point, and prepare the way for another profitable buying opportunity. Those wishing to buy $Gold should be accumulating cash, selling U.S. equities for example, in preparation for the next buy signal on this indicator.
While Gold has done well in dollars, $Gold is not the only price that has come alive. Gold in both Euros and Canadian dollars has been strong. This development can be seen in the last two charts. These charts also include the oscillator for over bought/sold to help investors denominated in those monies to make more timely purchases. These charts are new to THE VALUE VIEW GOLD REPORT so historical buys that might have occurred are not plotted beyond the last signal.
As shown in the €Gold graph, the movement of €Gold above €400 really lit the belly fires of speculators. Breaking above US$300, way back when, did nothing, but this did. Investors in a host of national monies took notice. Gold's brilliant fire suddenly burned bright for a far larger spectrum of investors. Some had expected $Gold to rally, but the €Gold move was not foreseen. Politics in the EU, French riots and the Jordan bombings reminded Euro investors of the need for real money in their portfolios.
As shown in the Canadian $ Gold graph, CN$Gold joined in the move. Gold moving above CN$560 was like a flame to a moth. Canadian investors have a long history of moving out of their national money. They should continue to use the over valued Canadian dollar to buy Gold when conditions are right. While the Canadian dollar has appreciated against the U.S. dollar as one economic consequence of the Patriot Act, the trend in CN$Gold clearly showed another picture. Canadian investors should be wary of the paper money illusion, and move to Gold when profitable buying opportunities develop.
However as can be seen in these graphs, Gold in both national monies has moved well into an over bought condition. Investors in both nations should be restraining purchases at this time. A better purchase price will develop. Always has! Both CN$Gold and €Gold will again move to over sold prices. Investors denominated in these national monies should also be preparing for future buying opportunities, rather than "chasing the rabbit."
A caveat in all this seeming
rationale thinking does exist. Markets discount the future, not
what we know today. The world has a massive investment in U.S.
dollar denominated assets. Much of the global economic machine
is dependent on the U.S. consumer spending binge. U.S. consumption
exceeds income. Negative savings is the term applied to that
situation. To date, that deficit has been financed by converting
equity in homes to cash. Should U.S. consumers not have access
to that source of cash, spending would fall by more than $500
billion. The U.S. dollar would plunge. 1930 would by contrast
look like a spring picnic. Is the Gold market telling us something?
Ned W. Schmidt
Ned W. Schmidt, CFA,CEBS is publisher of THE VALUE VIEW GOLD REPORT. That report nowincludes a weekly message, TRADING THOUGHTS, to help investorsidentify timely points for buying Gold and Silver.
You can join him for the Gold Super Cycle here.
His monumental report, "$1,265 GOLD," with 255pages and 98 graphs, is now widely known, and is available atwww.amazon.com or from the author. This work has nowbeen read by investors in over twelve countries.
Ned welcomes your comments and questions. His mission in lifeis to rescue investors from the abyss of financial assets andthe coming collapse of the U.S. dollar. He can be contacted atnwschmidt@earthlink.net.
Copyright ©2006 Ned W.Schmidt... All Rights Reserved.