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.
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.
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.
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.
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.
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.
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
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