Strong Nerves Required
Jun 27, 2007
The chart below (courtesy Bigcharts.com) is a weekly chart of
the $XAU up to June 27th 2007.
It is drawn on semi log scale which reflects percentage price
movements on the Y axis.
It can be seen from this chart
that the most recent price weakness brought it to rest on the
lower trendline that has been in place since 2002.
Can this trendline be penetrated on the downside? Of course it
can. It happened for a few months in mid 2005 - before pulling
back up to move within the rising channel once again.
Will it break down now?
In my view, this is the wrong question. It reflects a trader
mindset. The "right" question is: "Will the primary
uptrend of gold shares (and gold) - which has been in place since
2001, be aborted?
In a previous article, entitled "Gold
- Major Breakout Imminent" I expressed my view as clearly
as I could. The Primary Trend of the Gold Price is "Up".
I remain invested in gold and related investments, and will remain
invested until the evidence suggests a need to change my view
on the Primary Trend.
One of the problems in modern day markets is the overwhelming
presence of traders trying to second guess price movements on
a day-to-day basis using computer algorithms and other tools
of trading. With this in mind, it's probably appropriate to relate
an anecdote to illustrate the process of biofeedback.
Many years ago I landed up in hospital with Tuberculosis (Fortunately
I caught it early and it cleared up completely). But I was hospitalised
for some weeks. By some perverse twist of fate, I was admitted
to hospital on my twenty first birthday. That was a long time
One day an unusually pretty nurse came to my bedside to take
my blood pressure and monitor my heart pulse rate. She expressed
concern that all the readings were too high and she wanted to
call the doctor there and then. I prevailed on her to take the
readings a second time.
Using a de-stressing technique I had learned a few months earlier,
I 'centred' my thought processes and focused on relaxing. Taking
the readings again, she discovered to her amazement that they
were normal. (I told you she was pretty. What do you think happens
when a pretty girl approaches a young guy up close and personal?).
This process of slowing down my heart rate and lowering my blood
pressure is known as a 'bio-feedback' process. Armed with information
that was endogenous to the system, I applied an exogenous variable
which had the effect of modifying the behaviour of the entire
Biofeedback is real. The above is one of many examples that I
have personally witnessed and/or experienced during my lifetime.
It's not just some esoteric concept. For this simple reason,
you can throw all the computer trading programs out of the window.
They will work until they are trusted to work and, as soon as
they are trusted to work by a sufficient number of people, this
very trust causes them not to work. How does one program "sporadic"
variables into a computer - those that manifest occasionally
and only under certain circumstances? The answer is that one
can't, as some Nobel Prize Winners discovered to their shame
and multi billion dollar cost. For this simple reason, daily
charts are interesting, but not particularly relevant.
I tend to think of daily, weekly and monthly charts in terms
of tactics, strategy and philosophy. Primary Trends are a function
of philosophy. They are driven by culturally accepted thought
paradigms. These paradigms change slowly.
Secondary trends are driven by fashionable thought paradigms
(A bit over simplistic, but there's a point to make here).
Short term trends are driven by knee jerk opportunism - which
ebb and flow for reasons that may have nothing to do with financial
variables. For example, there may be a cold snap; or there may
be trouble brewing in Iran. These are little eruptions which
have the capacity to change the larger trends if they happen
to manifest at critical points in time.
So, if we are going to talk about the Primary Trend of the price
of Gold, we need to talk philosophically.
The arguments here are well known and have been discussed ad
nauseam. Currency of last resort, inflation hedge, store of value,
medium of exchange, external discipline on Central Bank behaviour,
I happen to think that these reasons, whilst interesting, miss
the "core" point. It is my view that Human Society
is reaching the culmination of the Neanderthal Era in its evolution,
and we will eventually (sooner rather than later) emerge into
a new, post Neanderthal era where the Thought Paradigms of society
are fundamentally different than today. All three Abrahamic religions
talk of a Messianic Age. On a more prosaic level, it seems we
may be on the threshold of a breakthrough in humanity's knowledge
Because I am alert to this potential breakthrough, I am also
on the lookout for evidence, and this evidence is manifesting
in a tidal wave. It's all around us.
By way of example, I have just watched a RealPlayer video which
shows seawater "burning" at 1500 degrees Centigrade.
By exposing it to radio waves, hydrogen and oxygen are released
- both of which are flammable. Humanity's knowledge base is literally
exploding, hampered only by the barriers and blinkers being set
up by our testosteronal and/or egomaniacal political leaders.
Depending on the level of wisdom, humility and maturity manifested
by these political leaders, this process of evolutionary change
could be violent and painful - forced on us by catastrophic collapse
of the old system; or it could be slow and sure - orchestrated
by a deliberate strategy that is different from what we have
been witnessing to date. I am hopeful, but I'm not holding my
breath. My personal interest in gold is that I believe gold will
have a pivotal role to play in the coming era. Unfortunately,
the problem with this philosophical mumbo jumbo is that it doesn't
put food on the table, so we need to take a view that is more
relevant to our immediate needs.
That's why the weekly charts are important. They bring the trends
down to the here and now, but still manage to avoid the day-to-day
opportunism which sometimes serves as nothing more than static
to obscure what is really happening.
In my view, one of the most
important charts that decisionpoint.com publishes is the chart
of the goldollar index. This is derived by multiplying the gold
price by the US Dollar Index. The weekly chart is reflected below,
and I would like to draw the readers attention to several 'clues'
contained in this chart.
The points of interest flowing
from the charts above are:
1. The upper trendlines of
the channels join two spikes in the gold price and the goldollar
2. These upper trendlines represent an "angle of incline"
- which is the "rate" of increase in price on both
charts, and which is mirrored by the angle of incline of the
lower rising channel line on each chart.
3. The direction of travel of the US Dollar Index chart has been
pointing down since 2002 - which is the opposite direction from
that in which the gold price has been travelling. This is what
has led most "investors" to argue that the gold price
moves inversely to the US Dollar - 'Therefore' they have concluded,
'Gold is the currency of last resort'
4. The US Dollar is approaching the apex of a triangle which
may lead to a breakup. The concern of many investors is that
if the Dollar breaks up, that's the end of the gold bull market
Let's look at percentages:
The Dollar Index fell from 120 to 80 or 33%. By the inverse
argument, the gold price should have risen by 50%.
In fact it rose from $300 to its current level of $650, or by
116%. The inverse relationship is simply not true. We don't have
to argue about it. The conclusion is based on fact. Let's move
Facts notwithstanding, which way is the Dollar likely to break?
The argument for the past few years has been something like this:
The Fed has been profligate in the way it has printed US Dollars.
The US National Debt is approaching $9 trillion. Interest on
that debt alone is $450 billion a year and rising. The US deficit
is chronic. It's a matter of time before the world's Central
Banks start to shy away from the US Dollar. A US Dollar collapse
is therefore inevitable.
The problem with this argument is that it ignores the fact that
70% (seventy percent) of all the reserves of all the world Central
banks added together is comprised of US Dollars. As a matter
of pragmatic fact, there is no alternative currency - no matter
what "public announcements" may or may not appear from
time to time about the intentions of China, Saudi Arabia or whoever
else happens to want to get their face in the news. Oh, so you
don't like the US Dollar? Okay, so what's the alternative? Euros,
Yen, Renminbi, Gold? All these added together represent the other
30%. It's a matter of simple and unarguable fact that the tail
cannot wag the dog.
So, given that this is also a fact, let's move on.
For the world's Central Bankers (acting in concert and in their
own self interests) to avoid implosion of the value of their
reserves, and contrary to popular argument, the most logical
behaviour on their part would be to support the
US Dollar, not dump it. Under no circumstances can the US Dollar
be allowed to collapse - at least not now.
But how can they justify their supportive behaviour to their
Well, how about this?:
"Capital needs to be put to work. It needs to earn a return.
Investing in the US Dollar now would be smart, because the yields
in the US are at the beginning of a long term rise.
(Chart below courtesy of decisionpoint.com)
This has sinister implications
to the mega-dollar capital value of US Treasury Bonds. If yields
enter a primary rising market, hundreds of billions of dollars
will be lost in the Treasury markets (which can be hedged by
the smarter operators by forward dollar contracts). How can we
avoid a catastrophe of 1929 proportions - which led to an implosion
Are we talking tactically, strategically or philosophically?
Philosophically, we can't. It's impossible. The US economy is
But maybe, from a strategic perspective, we can ameliorate investor
fear for the time being by allowing the equity markets to rise
in monetary terms.
Okay, let's look at the S&P 500 (the 500 large cap stocks)
Technically, it could be argued
that the SPX is hitting a Double Top, from which it may reverse.
If it pulls back significantly, there is a high likelihood that
the Gold Shares ($XAU) will get caught in the down draught -
and that the $XAU's rising trendline will be penetrated on the
Ah! But the Central Banks are not going to sit on their hands
just waiting for the technical analysts to panic. Therefore,
this is what they might be arguing over their post dinner Cognacs.
"The Dow Jones Industrial Index only contains 30 stocks.
Using derivatives maybe we can arrange for some obfuscation which
will get us through this period of uncertainty."
Okay, so let's look at the Dow Jones Industrials:
Oh my! Will you look at that?
It's broken up through its double top. Oh yes, it could pull
back, but the technical evidence suggests a period of strong
rises ahead. Yup! If that could be orchestrated then the losses
on the Treasury Markets might be offset by the profits in the
So the (admittedly circumstantial) evidence suggests that the
Central Bankers believe they can arrange for the tail to wag
the dog. (Of course they can't, but they will die trying - and
they may postpone the day of reckoning for a year or two or three).
Thus, if a situation could be orchestrated whereby the S&P
breaks up, this will evidence "inflation", and money
will flow back into the property markets because everyone knows
that property (and gold) is the ultimate hedge against inflation.
So let's look at the Real Estate indices: (Again, courtesy decisionpoint.com).
Fascinating! Again, the rising
trend is still intact - notwithstanding the recent strong price
So, when we put all the pieces of the jigsaw puzzle together,
we see a picture emerging:
Prices generally have been rising within identifiable channels.
Prices have been pulling back within these channel. Investor
confidence is being severely tested, because a breakdown below
the long term rising channel lines could lead to catastrophe.
This situation needs to be managed. How can the Central Banks
By protect the US Dollar, and by "ramping" the Down
Jones Industrials in the hope that it will spill over into the
other equity markets.
Will they succeed? Philosophically? Not a snowball's hope in
hell! Strategically? Yes, I think they might pull it off
for a year or two - in the hope that the centre of gravity of
the world's economy can be shifted to Asia. When that has been
achieved, the US consumers will have served their purpose and
they can be sacrificed. Oh well. For a few years there
they had it good. Now its someone else's turn.
Personally, morality aside, I have a problem with this strategy
because it relies on Neanderthal Fire as the primary energy input
across the planet. There is no way that Nuclear Fission
is ever going to replace Neanderthal Fire. My problem is that
if you treat the symptoms and ignore the cause, the patient will
inevitably drop down dead. His systems will become overloaded
But let's look at what is likely to happen in the medium term.
If the US Dollar breaks up, then this will
cause significant (short term) consternation in the gold camp
because "everyone knows" that Gold moves inversely
to the US Dollar.
But investors are pretty smart nowadays. It won't take them long
to work out that the rules of the game have changed. If the rising
dollar and rising interest rates do not give rise to a collapse
in equity prices then it will become obvious to Blind Freddy
that we are facing an era of inflation.
Inflation hedge assets will boom.
At the point that recognition dawns generally that we are facing
an era of inflation, the gold price will sever its historical
linkage with the US Dollar and will break up. The break up will
And what if the Central Banks fail? What if the double top on
the SPX is a true double top? What if the DJIA tail can't in
fact wag the economic dog - even in the short term?
Well then, we have to go back to fundamentals.
Fundamentally, the cause of the world's economic problems is
not debt or fiat currency. It is that we are stuck in a Neanderthal
Energy Paradigm. For many reasons Fossil Fuels need to be replaced
with more appropriate and far more powerful energy paradigms.
Why we are stuck here is a function of Neanderthal attitudes
towards the very concept of "control". Think of the
cartoon picture of Neanderthal Man - carrying a club in one hand
and dragging his woman by her heir behind him. Neanderthal man
was the ultimate control freak. Our solutions lie in the era
which, in turn, lies Beyond Neanderthal. (see www.beyondneanderthal.com)
After twenty years, I have concluded that there are at least
three energy technologies which, together, could facilitate a
new Energy Paradigm. They all appear practical from the perspective
that they can be perfected and commercialised within a decade.
One of these will be 'fuelled' by gold.
Gold is therefore a three way bet for me.
If the Central Banks are successful in their game playing, inflation
will be upon us and the gold price will soar
2. If they are unsuccessful, the
dollar will collapse and the gold price will hold its value and
maybe even soar upwards - because it is an insurance policy against
3. In time, if the system does
fail, gold will form a foundational cornerstone in a new era.
If we still have an affinity to the concept of amassing riches,
then the gold price will soar.
Short term, the gold price
may weaken further. Long term, the Primary Trend is UP. Nowadays,
the short term is very short indeed.
Jun 27, 2007
Since 1987, when Brian
Bloom became involved in the Venture Capital Industry, he has
been constantly on the lookout for alternative energy technologies
to replace fossil fuels.
Brian Bloom's novel Beyond Neanderthal is a factional work
which took over twenty years to research.
Via the medium
of its light hearted storyline, it examines how the world has
gotten itself into the horrific quagmire of economic and social
problems with which we are now faced - and puts forward one possible
course of action on which we might embark to dig ourselves out.
It may be ordered
over the internet via www.beyondneanderthal.com. Or purchased from