Where's it all going?
Pakistan in chaos, the US continuing to run massive current account deficits, the dollar suddenly rallying, the stock market shaky, US banks reeling in the face of huge subprime losses, the war in Iraq in its sixth year, presidential contenders battling each other, Fed Chief Bernanke pressed against the wall, Notre Dame's football team with one win and nine losses -- where's it all going? Is the US or even the world at the brink?
I read about the individual problems and there are a slew of them, but taken all together they are too much for me. I can't grasp the full meaning of what is happening. So I turn to the stock market. I can understand stock movements. I've been watching stock movements for half a century. Is what's happening good for the stock market -- or bad? If it's good for the stock market, then our lives will probably improve. If it's bad for the stock market then our lives are fated to deteriorate.
I've been warning that gold is very extended. The P&F chart below follows GLD, the exchange traded fund and proxy for gold.
Gold has advanced from the 66 box to the 83 box or 17 points without so much as a (three-box) correction. That ended today when gold plunged 30 dollars, taking GLD to the 80 box. Is this the end of gold as a monetary asset? Hardly, it's just an overdue correction in an ongoing bull market.
There's been a lot written lately about gold going to 1000, 1500, even 2000. My own opinion is that gold is going well over 1000. But not this month and not this year. Gold will rise in its own methodical way. And along the way it will correct, sometimes gently, sometimes brutally. Gold is traded in a free market, and free markets correct. The corrections always seem to come as a surprise, but the corrections do come. We're experiencing one now.
What's happening now is that nobody wants to lend. The system has suddenly become paralyzed because nobody knows how solvent anyone else is and whether a bank should be lending at all.
On top of the that, the yen has suddenly exploded higher, and in so doing it's killing all those in the carry trade who are short the yen. This has triggered a mass of liquidation in order to cover yen losses. One of the items being liquidated is gold. Gold is being sold to raise money to cover carry trade losses.
One thought. When gold sells off, the question is always, "Is this just a technical correction or could this be a forecast of deflation?" If it's the latter, then Fed chief Bernanke is being put on notice that he's losing his battle with the bear. That means high-powered ammunition is required from the Fed -- lower interest rates and more liquidity is needed.
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