>I am certainly willing to speculate that Gold *could* run again.>
<But it might also bounce and fail too...>
You can't have it both ways, Michael. But I suppose that is the essence of technical analysis or BIG MOMO trading. Yes, I know "Price" Determines everything for the BIG MOMO or Technically Oriented Traders like yourself.
In general economic terms - once a credit expansion, or an inflation of the quantity of money, hits the commodity markets and force prices to highs not seen for decades - they inevitably cascade forwards through wholesale prices to higher producer price indexes to higher consumer prices. Commodities are the raw materials of production. Nothing in the way of REAL goods can be produced without them.
Over the past three years, Gold has climbed from $US 255 to just below $US 430. This is the leg which (I profited from) has brought to an end the two decades plus of lower highs and lower lows in the $US Gold "price". As a rule, neither the markets nor the general public notice this first leg. If they do notice, their reaction is to redouble their efforts to debunk Gold. At the end of this first leg, there is a change over which begins when interest rates start to climb as climbing commodity prices send out the signal for eventual increases in consumer prices. As interest rates begin to accelerate upwards, commodity prices (and Gold) correct.
As this change over continues, professional people in the financial markets who are seeing the value of their paper investments (both stocks and bonds) begin to burn down as interest rates climb, also begin to see all their everyday costs of living climb as consumer prices start to climb. These people start to look for ways to protect their remaining financial wealth. Their paper assets are losing value. The paper money they hold is losing purchasing power. They look further afield, and they find Gold.
But before they latch onto Gold, they go through a period of extreme "disorientation". The value of their stocks is not keeping up. The capital value of their debt holdings (bonds and loans of all descriptions) is declining as market rates of interest climb. Even the value of real physical investments in commodities (and precious metals too - counted as commodities) falls in the early stages of an interest rate rise. These people begin to look more and more urgently for an "asset", or even a "money", which gives some promise of maintaining its value and/or purchasing power. They have ceased to search for capital gain, they are now not even concerned about earning a "rate of return" on interest-bearing assets. They want an investment vehicle which does not fall in value. They eventually discover that Gold is what they are looking for.
As measured by inflation of the US stock of money and the even more drastic credit expansion since 1992, the economic situation looks dire. The point could and likely will come where professional people in the financial markets begin to sell, and then dump, their remaining paper financial investments and huge amounts of their real physical wealth, simply to finally stand safely in Gold. But whenever this process starts (and it has not started yet) and however long it takes, the general public does not participate in the second leg of Gold. They are caught between their debts and the climbing market rates of interest. They are also caught by the ever climbing prices of consumer goods. As they see it, they cannot afford to own Gold, since it does not pay a return and therefore cannot help alleviate their plight. Besides, the price of Gold is "too high", so they wait for another correction.
When the chain of higher prices finally reaches the shop counters, then and only then does the general public realize that money, as such, is LOSING value against real physical economic goods. Another economic effect also takes place in the financial markets. An increasing number of lenders suddenly realize that they cannot keep lending at such extremely low rates of interest. It now becomes clear that from now on, they will be repaid in money with a falling purchasing power. This is the economic reason why they hasten to RAISE their lending rates - their interest rates. They must compensate for the now expected fall in the future value of money. It is this event which causes all commodity prices to break their upward run and "correct" - often quite violently.
The problem is acute. Money, as such, is now clearly seen to be losing value. So a search begins to try to find a place where monetary wealth will keep or improve its value. When that happens, Gold appears.
At XAU 57-58, I will invest the remains of my portfolio again in the gold mining stocks.
Till then, Cash is King. |
