The Dow-Gold Crossover Part II
Ignition ... when?
Alex Wallenwein
February 22, 2005
Yes, I know. There were a couple of mis-firings on the way. So
what? Getting a gold-shuttle up into orbit isn't that easy, after
all. At least, it didn't blow up like Challenger did in 1986.
But a powerful sign of either an imminent lift-off (or a new
gold-attack) is occurring right now. In the first Dow-Gold Crossover article I predicted a
time, not far off, where the Dow and gold - which have trended
together from mid-2003 until Early January 2005 - will part ways.
(by the way, if you're still not convinced that gold and the
Dow have become buddies - and the Dow and dollar enemies - of
late, please consider this chart):
When the Dow starts falling
off, but gold continues its inexorable upward trend, all kinds
of hell will break loose.
And it looks like that's about to start happening.
During a few weeks, from January 19th until February 6th or so,
the 20-month old dollar-Dow inversion appeared to have dissolved
itself. Yesterday, the Dow officially went back into the red
zone for the year (which it hasn't really left but for a brief
moment) while the dollar continues to resume its fall.
Naturally, as the dollar resumed its descent, gold resumed its
only briefly stalled upward momentum. This appears to be turning
into the long-awaited Dow-Gold Crossover. (In the process,
another Euro vs Dollar Monitor prediction from January came true:
the short-term dollar-bounce/gold-droop resolved itself before
the end of February, 2005).
What will happen now will show how much 'oomph' is left in the
old US/Fed economic consortium.
Greenspan has not indicated that faster rate rises are on the
horizon. Continued quarter-point hikes til the end of the year
are already priced into the dollar. His bit about the current
account deficit self-correcting as a result of "market forces"
hasn't convinced anybody, so the dollar is back in decline and
gold back in rising mode.
If the Dow now joins the dollar on its downward journey, it will
be exceedingly difficult to trash gold. Therefore, if gold is
successfully trashed to keep investors fixated on the Dow while
the dollar is falling, then there is quite a bit of moxie left
in that old paper-engine.
If gold keeps on rising, on the other hand, but the Dow keeps
falling, then we're very near the end of the "Miracle on
20th and C Street" (the address of the Federal Reserve building
in DC).
Why would the Dow keep falling?
Because Al "the Green Goblin" Greenspan has miscalculated
somewhat - but that's understandable, given how many lies the
guy has to keep spinning at the same time. It gets confusing
after awhile.
True to form, just about at the time when his continuous rate
rises were showing some bite and were promising to prop up the
falling dollar enough to forestall a world-wide headlong flight
into alternative currencies, the Dow started turning south.
Take a look at the period from December 31st to mid-January on
this chart:
Then, from mid-January until
early February, gold fell while the Dow and the dollar rose together
- briefly. That's okay with the US establishment. But now, with
the dollar still falling, the Dow is having a hick-up while the
anti-dollar contingent (gold and the euro) are slowly rising
again.
The very short time frame does not really allow any serious prognostications
as to a sustained major gold rise in the short term. But when
you include the XAU gold stock index in this analysis, then we
get quite a different picture - as gold stocks have often acted
as a lead-indicator for COMEX gold. (Interesting to note here
is the February 4th time slot on this chart. It looks like the
dollar, gold, and the XAU [the hot-pink line] changed directions
within a day of each other, while the Dow briefly continued its
uptrend.)
At that point, the dollar resumed
its downward path, gold began to slowly climb, and the XAU shot
up like a bat out of hell. All the while, the Dow kept on rising
back to its December 31st level, which it only reached a few
days ago - before falling again.
Right now, the dollar-Dow down move in the face of a gold/XAU
up-move is only two days old, but there are fundamental developments
that indicate this may well continue.
Only two days ago, the Green Goblin has said that inflation
and inflationary expectations were "well anchored".
Today, February 18, 2005, we find that the PPI shows a significant
up-tick in core producer prices during January, to the tune of
0.8 percent. That's a whopper for just one month - and
a nice little glove slapped in the goblin's face - curtesy of
the market.
Of course, real consumer price inflation has been strong
for some time as Jim Puplave showed in several of his last expositions.
But now, that PPI increase - since it is likely to continue -
will soon trickle down to even official representations of consumer
price levels. Either that, or companies will be afraid to pass
it on - and their profit margins will shrink.
That doesn't bode well for the Dow.
Higher inflation means rising interest rates, which means
tighter money, which means higher debt payments for individuals
and businesses, which means lower profit margins all around ...
which is of course bad for stocks.
On top of that, when higher inflation causes faster rate increases
is will tend to boost the dollar which is NOT in the US
establishment's interest since it is bad for the Dow. (See the
top chart).
Real bad.
But here is the problem: Greenspan has shown in his last two
speeches before Congress that he is afraid of faster rate
rises. He played the likelihood of those down by emphasizing
how "low" inflation supposedly is. Now the PPI-jump
is forcing his hand - either way, causing him to stick his foot
right up his mouth. (Pretty agile for an old man, isn't he?)
Either he raises rates (and therefore chokes the economy off)
faster, or he keeps his "measured" pace and
the dollar goes back into free-fall mode - as it is already wont
to do despite his series of rate hikes since June last year.
Neither contingency is in his play book, so he is in a bit of
a tight spot here.
In short: The sorcerer's apprentice is watching the broomsticks
carry bucket after bucket of water into the den. But this particular
apprentice's main problem is: The sorcerer ain't comin' home!
He's dead - if there ever was a "chief sorcerer"
out there. Our Goblin himself is now chief magician 'extraordinaire'
- and none greater has ever lived, according to the press. There's
no one to turn to but God himself - but God has been systematically
excluded from all of the establishment's magnificent calculations.
So, it looks like "all systems go" for the (possibly
final) Dow-Gold Crossover.
If the Dow turns down while gold (and especially the gold
stocks) move up for any length of time, an eventual stampede
out of stocks and into gold-related investments is inevitable
- and that is exactly what the establishment is afraid of.
With inflation up, bonds will fall and long term rates will rise,
making debt payments more expensive, houses more expensive, and
all of this is bad fo rthe Dow ... yada, yada, yada. We've talked
about it all ad nauseum in previous essays.
Now, it seems it's about to happen.
I hope you've bought lots of 'physical' on gold's way down from
$455 to $410. If not, this would be a good time - before the
COMEX' decoy gold price goes over $500 this year, and then beyond.
(Isn't it wonderful that you can actually buy real metal
at these phony prices?)
Got gold?
Alex Wallenwein
Editor, Publisher
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