Gold Lives in a Cage
It's been a while since I've written publicly about gold. I guess one of the reasons for that is because little has changed regarding my outlook (which has been correct) as published on this site, and other sites as well as in my daily client newsletter.
With that said, I'd like to give an update regarding my most current thinking.
I still believe that the Financial Engineers have a firm grip on the price of gold, and I also firmly believe that is the reason we have been unable to penetrate the 330 level. Absent bank selling, I think gold would have spiked much much higher.
I am maintaining the same trading strategy I have been using for months. I am long gold futures... I sell half in the 325-330 area and buy it back in the 310-320 area. I remain long the other half in case something unexpected happens. I do not want to be completely out of the market, and I will not short it in this environment.
I don't believe that the Financial Engineers will let gold surpass the 330 level unless they lose control, and I don't expect them to lose control unless an extraordinary geopolitical or financial event happens. In my opinion, control of the price of gold, or the "stealth gold standard," as I've been calling it, is one of the most fundamental tenants of modern central banking. There can be no alternatives to paper money for the storage of wealth on a large or a global scale. If there was, then the entire global fiat money system would be at risk. I believe this house of cards will ultimately fold, just as every other fiat money system ever invented has, but the system has proven its ability to withstand a tremendous amount of stress. I'm not holding my breath for it to imminently collapse without an external shock.
I do believe there will be a US attack on IRAQ, and I think the attack will carry significant risks (like starting WWIII). I think the plans and the hardware for an attack are already in place, as is the plan to occupy IRAQ afterwards and how to divide up the oil. The only thing that's missing is an internationally accepted reason to go in... but that won't stop the war machine.
Even if somehow war in IRAQ is averted, I am extremely concerned that the "American Empire" as it is being called by some overseas is going to get into trouble with ideas like "pre emptive strikes to preserve the peace". Current international law has no provisions for such doctrines. The US is being compared by some to the Roman Empire and I see a lot of similarities myself. when Rome became unhappy with the way indirect control of other regimes was going they decided to do it themselves...in my opinion we are in a period analogous to either the expansion period of the Roman Empire or the decline period. Trading wise, I'm trying to position myself for either case until I figure it out.
I'm currently long gold as an insurance policy. I could foresee several scenarios in which there would be a stampede into "real things" as the public loses confidence in intrinsically worthless paper money and financial assets in general.
I think the equity markets remain overvalued. Very early this year I was making fun of the Wall Street analysts (salesmen) talking about how much value there was in AOL in the 30's. Look at it now.
I also believe that in the Financial Engineers are attempting to construct an environment highly favorable for money to flow into equities and I believe that the Plunge Protection Team has been stealthily active in preventing a market crash. Back in 1999 and 2000 I maintained that the Financial Engineers would not let this market crash and instead what we would see would be a "buffered crash" of much longer duration without an actual meltdown. That is exactly what has happened. Now I believe that we are firmly in the grip of a secular bear market which will grind lower, punctuated with bear market rallies. If the US attacks IRAQ, then all bets are off as far as I'm concerned.
I think there is a real estate bubble and I think it's about to burst. The consumer is tired and tapped out. I believe that the CPI is grossly understating the inflation rate in terms of the actual amount of money a household needs to make ends meet. Sure, you can buy a bigger TV for less money and a faster computer, but when you factor in the cost of insurance, home prices, entertainment, gas, food, etc. the reality is that the total bill is skyrocketing and the CPI intentionally does not capture it, because if it did, it would cost the government billions. So, what we're seeing is a stealth decline in purchasing power which in addition to everything else going on, is going to be a tremendous and increasing drag on the consumer going forward. Especially hard hit will be retired people and people living on fixed incomes. They've been hit with a double whammy (that's a technical term) of very low interest rates and understated inflation. They're earning less and spending more. I don't need a study to tell me that, it's just simple common sense.
Many of the wall street salesmen have been pitching the idea that the consumer is about to recover. Hogwash. In the month of November many retail outlets book 1/4 of their annual sales. Get ready for one of the worst holiday shopping seasons in a long time. The consumer has lost a lot of money in the stock market. He's worried about the economy and his job. He's in debt up to his eyeballs. He just bought a bigger house with a floating rate loan at the lowest interest rates in 40 years. The excesses of the roaring 90's have set into motion a set of secular forces that will be at work for a long time.
Lastly, I don't think we are going to have a deflationary collapse. I believe the US dollar is overvalued. I am long the Euro and the Canadian Dollar and I'm short the US dollar index. If things get ugly, I'm going to be looking for something more like hyperinflation here in the US because of an artificially inflated USD and a suppressed price of gold. I continually ask myself the question, "how much of this intrinsically worthless paper money can be created out of thin air before it becomes wallpaper?"
Gold normally is the barometer for the health of fiat money but if the price is being suppressed then we have a broken barometer. In my mind it's sort of like driving your car with a broken gas gauge... when are you going to run out? Who knows... except that sooner or later you are going to run out.
Meanwhile... gold lives happily in its cage.
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