Update: Gold Super Cycle to $1,257 Gold
By Ned W. Schmidt CFA,CEBS
Oct 1 2002
Since we last talked of the forces coming together to create a Super Cycle in Gold that will carry to $1,257 Gold a number of factors have converged in time nicely to bolster the position and prospects of Gold investors. Before progressing, let us note that our optimism is primarily aimed at Gold bullion/coins as the Gold stocks appear to be well ahead of the fundamentals, though that discussion is for a different time. What more could Gold investors want? We have (1)U.S. inflation bottoming, (2)a leaderless Federal Reserve, (3)a currency that has peaked, (4)hedgers and shorts finding themselves in a difficult situation growing worse by the day, (5)a U.S. Housing/Mortgage Bubble about to pop, (6)another step in the Pan-Eurasian Islamic War and (7)Gold trying to take out the previous high. Not yet a 12-step program, but certainly enough steps to appease most discerning investors.
Let us ask the question one more time. What more could Gold investors want?
The first chart, U.S. INFLATION SITUATION, shows recent developments on U.S. inflation. As we have discussed before this graph has two inflation series plotted. The first, indicated by the squares, is the Naive CPI released by the government each month, and used by the Federal Reserve to rationalize their policies. The second is the Median CPI produced by the Federal Reserve Bank of Cleveland. This latter measure is probably a better measure of the central tendency of U.S. consumer inflation.
Let us first note that the Naive CPI, on a year-to-year basis, appears to have put in place what most would consider a double bottom. Second, that measure has moved above the most recent short-term high. Were this series to be a stock we would conclude that a bottom has been put in place and that it is likely to move higher.
The Median CPI, the preferred measure of U.S. inflation, continues to run well above the Naive CPI. As reported previously the difference between these two series can be used to create buy and sell signals on the Naive CPI. Buy signals continue on the Naive CPI, and we expect it to move materially higher.
That the U.S. central bank, like so many around the world, has less than exciting and inspiring leadership now seems fairly obvious. Discretionary and visionary monetary policy, as practiced by the Federal Reserve, was not too many years ago billed as the "vaccine" against all economic ills. Rather than a "vaccine," contemporary monetary policy seems no more than another discredited theory. Certainly the divinity of the practitioners is no longer considered dogma.
We need only look around for examples of the failure of monetary policy. The Japanese stock market is around a 19-year low, and off about 80% from the high. The U.S. stock market bubble has burst. Down about 80% from the high the NASDAQ 100 has demonstrated the "new" economy had, like Microsoft products, more than a few bugs remaining to work out. Most of us will never see the NASDAQ indices recover to their highs in our life times.
During a past century Jackson Hole, Wyoming was a favorite gathering place for desperadoes, bank robbers and other undesirables. For that reason a meeting for the purpose of assessing the success of the Federal Reserve would seem to be appropriately located. Recently it was the location of a meeting of the best and brightest of the formulators of U.S. monetary policy with the intent of recounting their successes.
The Chairman of the Federal Reserve reviewed their actions during recent years. According to reports, the Chairman claimed the reason the Fed did not act to halt the stock market bubble was that the existence of a bubble was not certain. Further, that had they acted to halt the bubble a recession might have developed. How to response to such utter nonsense without being tacky? As Thumper's father said, "If one can's say nothing nice, don't say nothing at all." All that probably can be said is that every man has his day, and sometimes that day has passed.
The great news in all this ineptness is that the Federal Reserve does not yet believe a Housing/Mortgage Bubble exists in the U.S. With that view on their part we probably are safe in assuming that a U.S. Housing/Bubble does indeed exist, it will certainly pop and the U.S. economy will plunge into a deeper recession. Few forecasting sources are as valuable to an
investor as one that has developed a tendency for being consistently wrong on major matters.
The graph titled U.S. MORTGAGE APPLICATIONS contains two series. One of those is real transactions, relating to the purchase of actual houses. That line is the squares and uses the right axis. Another line is made up of circles and represents mortgage applications to refinance existing mortgages. These transactions are not real, but are simply the swapping of financial paper.
As is readily apparent, mortgage applications for real housing transactions peaked last year. That development is showing itself in the lackluster trend in real housing transactions. Data from the National Association of Realtors indicates that the sale of single family homes remains below the level of August 2001, prior to 9/11.
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