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Is Greece the canary in the coal mine? Less than a
week after European leaders crossed the T’s and dotted the I’s on
the debt-restructuring plan for Greece, the prime minister's ruling party
called for a surprise referendum on the E.U. debt deal. Then on Thursday he
called it off. Sovereign debt and fiat currencies are all paper.
All that is happening only heightens talk about gold
as money. But first, let’s have a definition of money, it being a
subject that interests almost everyone on the planet. Like Voltaire said:
“When it’s a question of money everyone is of the same
religion.”
Wikipedia defines money as: “Anything that is
generally accepted in payment for goods and services and in repayment of
debts. The main uses of money are as a medium of exchange, a unit of account,
and a store of value.”
No other commodity has been as universally valued
over time and across as many societies as gold and silver. There is an
emotional and cultural attachment to it handed down to us through the
generations. It is undoubtedly a store of value, it is a unit of account, but
is it used as a medium of exchange?
Not really, other than in Utah which took steps
recently toward making gold legal tender. Other states have proposed similar
measures. But people today are completely unfamiliar with the use of gold as
money since everyone uses paper money or bank credit money, such as checks
and credit cards.
According to the Austrian economist Carl Menger, its acceptability in trade is the defining
property for money and gold does not fit that criteria. According to Menger, while money undoubtedly does serve as a store of
value and a unit of account, these properties are derivative, not
definitional properties. The reason that a medium of exchange (money)
necessarily is also a store of value is the anticipation of its exchange
value in the future. The question of whether any particular good is money, can be articulated thus: Is it accepted as the
final means of payment for transactions?
At present almost all the nations have their own
fiat money or else they belong to a currency union such as the European
Union. Some nations use the US dollar. Hardly anywhere do we see gold
accepted as a means of payment. So gold must fail the definitional test of
being money.
So gold is not really money anymore (not yet?), but
keep in mind that it does have most of the desirable properties of money. It
is durable, portable and easily divisible into bars and coins that share
uniform properties. It is easily recognizable. Gold's value and purchasing
power are stable over time, as its supply grows slowly and it cannot be
created ad infinitum as fiat paper currency can be.
For nearly three thousand years since the first gold
coins were struck in Lydia in 700 BC, Gold's primary use has been recognized
as a medium of exchange. The history of gold as money in coin form spans 2630
years, from 700 BC to about 1930 AD. In comparison, the history of paper and
base metal and silver coin in circulation spans only about 40 years, from
1930 to 1970. And the history of paper and base metal coin with no connection
to Gold or silver, also spans a period now
approaching 40 years - from 1970 until today.
So it’s 2, 630 years of history for gold as
money versus about 40 years for fiat currencies not tethered to gold.
Leaving history alone, let’s see how the
situation looks in the precious metals market this week. We’ll begin
the technical part of this essay with the analysis of mining stocks. We will
start with the very long-term XAU chart (charts courtesy by
http://stockcharts.com.)
 
In the very long-term XAU gold and silver
miners’ index chart, we see that index levels are once again trying to
move above their 2008 highs. Once this is accomplished, the next stop appears
to be considerably higher, and an upside target levels of 220 and 230
(previous highs) seems reasonable. We have
a bullish situation at hand.
In the long-term HUI Index chart, the outlook is
also bullish. It’s important to note that the RSI level here is still
not yet in the overbought range. In the past, tops have previously formed
when the RSI level was close to 70. This is not the case today, and although
price corrections along the way have been significant, the time that it took
was pretty insignificant.
Gold stocks are now close to the 600 level and once
this is taken out will likely approach 640. This is the trading range of the
September highs and could very well be reached again. The
situation here remains bullish at this
time.
In the short-term GDX ETF chart, we have seen a
breakout which has not yet been confirmed. Based on this factor alone, the
situation is only slightly bullish. However, other factors mentioned earlier
(XAU and HUI charts) suggest that a move higher is more likely than not. The
next target is at the $67 level - at the previous highs.
As far as analysis of the junior mining stocks is
concerned, we take the long-term approach, so in most cases we review it on a
monthly basis. While we will leave our stock picks to our subscribers, we
would like to provide you with a quick overview of the whole sector. We will
use the TSX Venture index as a proxy for the junior sector.
Over a month ago, our SP Long-term Junior
Indicator had
flashed a buy signal which suggested moving back to the junior sector, and so
far it appears to have been a profitable move.
The above indicator flashes a buy signal when it
moves below the lower dashed line and starts to rise and it flashes a sell
signal when the indicator is above the upper dashed line and starts to
decline. In this case, we’ve seen the former and it the outlook for
juniors is bullish.
As you see, the outlook for juniors reinforces the
outlook for senior mining stocks. This is also in line with our outlook on
precious metals themselves. The latter was reflected in our latest essay on precious metals and the stock market. In that
essay, we wrote the following:
As of now, we are still
inclined to think that in the very-short term a move up in gold is more
possible than not. This obviously doesn’t alter our long-term bullish
outlook in any way.
(…) the analysis of long-term interest rates and of
the general stock market suggests possible higher prices across the PM sector
in the immediate (!) term.
The situation was bullish last week and continues to
be so today. At present, this is also backed up by the developments in
miners.
Summing up, the gold and silver mining stocks appear poised to
move higher across the board. This is additionally confirmed by the
information coming from the junior market.
To make sure that you are notified once the new
features are implemented, and get immediate access to my free thoughts on the
market, including information not available publicly, we urge you to sign up
for our free e-mail list. Gold & Silver Investors should
definitely join us today and additionally get free, 7-day access to the
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It's free and you may unsubscribe at any time.
Thank you for reading. Have a great and profitable
week!
Przemyslaw
Radomski
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