With technical indicators today suggesting gold could dip
as low as US$1,322 an ounce in the current corrective phase, bears and bugs
are deploying opinions in-line with their interests. The drop by nearly $100
in ten weeks is nothing new, nor is the strident tone growing in both camps.
Its all consistent with the bull market in gold and silver that has been
underway for the last decade.
In
a pattern that is as clear as the four seasons, the tone in the media
presages market sentiment, which segues into market action, then market
re-action, classically followed by market price adjustments for
over-reaction, which itself engenders a reversal of market sentiment, and a
subsequent reversal in media tone. Metaphysical economic ping pong at its
finest.
To
detail and exact example would render this an unreadable article, because the
micro-focus on step by step events could cause migraines. Far better to
recognize the pattern from a 10,000 foot viewpoint without zeroing too
closely on the details – you risk missing the core message and
opportunity.
That
is the classic problem with the mainstream financial press, which can only
report what is happening right now. Drawing conclusions about future
performance from current data departs the realm of journalism and enters that
of opinion, and we know how common those are.
That
being said, it is nothing short of remarkable how vast the quantity of high
paid experts in vaunted positions yielding astronomical pay are so
consistently wrong, and yet retain their overpaid posts.
In
an article published by Bloomberg on October 23, 2006, after gold had lost
20% of its value after touching what at that point was a 26-year high of $732
an ounce. John Reade, a UBS analyst and one of the generally most incorrect
predictors of metals prices in the last ten years stated then, “There
seems little sign of investors and speculators wanting to rebuild long
positions.”
Another
analyst quoted, David Thurtell from BNP Paribas said, “`The inflation
outlook is fairly benign. Investor demand will not be as strong as it has
been.”
CIBC
World Markets analyst Stephen Bonnyman said at the time that it expected
metals prices to remain volatile. “Barring a major contraction in
global economic growth, we see little risk of collapse in metals prices but
expect a gradual decline from existing levels,” said analyst in a note
to investors.
CIBC
revised its price outlook for gold for 2006 to $580 an ounce from $675 an
ounce, while the price for silver was unchanged at $12 an ounce.
Gold
has corrected in price in excess of 20% no less than 46 times since the onset
of the bull market in 2001. Each time, the analysts and money managers come
marching out of the woodwork to proclaim and end to the bull market, only to
be sent slinking back in silence as the price of gold powers to new highs.
What
is most important in understanding the long term price direction of gold is
not listening to analysts at banks whose opinion is a reflection, in general,
of what has already happened as opposed to a thoughtful analysis of what is
unfolding. It is the fundamental realities in the global economy that instigated
the bull market in gold, and continues to drive it higher, in the macro
sense.
The
number one catalyst in the birth of the gold market was the broad perception
that the U.S. was printing too much money relative to its GDP and tax base in
order to finance its military and political ambitions in the middle east,
where it has historically had a vested interest in maintaining instability
thanks to that jurisdiction being the primary source of energy for the United
States.
After
World War 2, the U.S. learned that the most strategic resource in maintaining
military superiority was control over fuel supply. From that point forward,
it set about covertly destabilizing regimes in jurisdictions where the
political climate was not conducive to its own interests, i.e. continuous
supply of relatively inexpensive oil. Venezuela, Saudi Arabia, Iran, Iraq and
Egypt have all seen the history of their political leadership influenced by
the machinations of the CIA.
What
the U.S. discovered subsequent to that period was that it could not afford to
finance a mult-faceted military presence without going deep into debt, which
it then proceeded to do with the blessing of economists of the era who
espoused deficit spending as the path to economic prosperity.
The
fast-forward result is $14.7 trillion U.S. dollars in debt held by the rest
of the world who can now ill afford to either buy more or sell any lest they
cause a panic for the exits. The only reliable hedge against the U.S. dollar
devaluation strategy now underway by the Americans is the monetary metals.
China,
the biggest holder of U.S. debt, is acutely aware of this, and this is one of
the reasons why it has become the biggest producer of gold in the world. It
will foil America’s attempts to dominate the world with the dollar by
replacing it with the yuan backed by gold and silver, platinum and palladium.
This
fundamental reality has not altered one iota since manifesting itself in the
early part of the last decade. If anything, the willingness of the U.S. to
debase the value of its currency and impoverish its general population is
seen to be increasing, as it purchases an average of $75 Billion of its own
treasurys with its own checkbook, i.e. the Federal Reserve.
These
corrective windows are opportunities for those seeking to preserve net worth
to buy gold, and for speculators to accumulate gold, silver, platinum and
palladium producers and explorers.
The
only global fundamental change that will alter the direction decisively of
the price of monetary metals is a revaluation of the U.S. dollar on an
official basis – a move for which the political power and moral
integrity are both thoroughly absent.
I
am not a gold bug. If the U.S. dollar were to be a correctly valued and
unencumbered monetary unit, there would be no need to own gold and silver.
But that is not the case, and so, in gold in silver we have no choice but to
place our trust. For the long term, that will not change.
James West
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