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When gold broke
450 last week it made a key breakout. For the past nine months, 450 has been
resistance on gold. The move up in gold is being helped by fears of inflation
due to several things - the flooding in New
Orleans, high oil prices, signs that the Fed is near
the end of its cycle of raising interest rates, and an increasingly
vulnerable dollar.
The spending
approved by Congress and the President for New Orleans is busting the budget deficit. According
to Republican Congressman Ron Paul:
"Congress
reacted to Katrina in the expected irresponsible manner. It immediately
appropriated over $60 billion with little planning or debate. Taxes won't be
raised to pay the bill - fortunately. There will be no offsets or spending
reductions to pay the bill. Welfare and entitlement spending is sacrosanct.
Spending for the war in Iraq
and the military-industrial complex is sacrosanct. There is no guarantee that
gracious foreign lenders will step forward, especially without raising
interest rates. This means the Federal Reserve and Treasury will print the
money needed to pay the bills. The sad truth is that monetary debasement
hurts poor people the most - the very people we saw on TV after Katrina. Inflating
our currency hurts the poor and destroys the middle class, while transferring
wealth to the ruling class. This occurs in spite of good intentions and
misplaced compassion."
"We face a
coming financial crisis. Our current account deficit is more than $600
billion annually. Our foreign debt is more than $3 trillion. Foreigners now
own over $1.4 trillion of our Treasury and mortgage debt. We must borrow $3
billion from foreigners every business day to maintain our extravagant spending.
Our national debt now is increasing $600 billion per year,
and guess what, we print over $600 billion per year to keep the
charade going. But there is a limit and I'm fearful we're fast approaching
it."
"Runaway
inflation is a well-known phenomenon. It leads to political and economic
chaos of the kind we witnessed in New
Orleans. Hopefully we'll come to our senses and not
allow that to happen. But we're vulnerable and we have only ourselves to
blame. The flawed paper money system in existence since 1971 has allowed for
the irresponsible spending of the past 30 years. Without a linkage to gold, Washington politicians
and the Federal Reserve have no restraints placed on their power to devalue
our money by merely printing more to pay the bills run up by the
welfare-warfare state."
"This
system of money is a big contributing factor in the exporting of American
jobs, especially in the manufacturing industries."
"Since the
last link to gold was severed in 1971, the dollar has lost 92% of its value
relative to gold, with gold going from $35 to $450 per ounce."
"Major
adjustment of the dollar and the current account deficit can come any time,
and the longer the delay the greater the distortions will be in terms of a
correction."
On Friday, the University of Michigan sentiment survey was released
and showed a sharp plunge in consumer confidence from 89.1 in August to 76.9
this month. Even more troubling, the survey's expectations component fell to
63.6 from 76.9.
High oil prices
and maxed out credit cards may finally be taking their toll on consumers. They
certainly have them worried, but consumers have not yet taken action based on
these worries, they have yet to slow down their spending. It is only a matter
of time before they'll have no choice in the matter. The economy has been
slowing all year. Over the past four quarters, GDP growth has slowed down. Manufacturing
orders have been falling every month.
These facts have
economists looking forward to the end of the Fed's cycle of raising interest
rates. The Fed meets Tuesday to decide whether or not it will raise rates
again this September. Some weekend news stories are looking for the Fed to
raise rates, but to cushion the impact by dropping its familiar verbiage of
doing so at a "measured pace" to prepare the ground for the end of
the cycle. I don't know if they are going to do that or not, but I'm sure
such speculation has helped fuel gold over the past few days. I wouldn't be
surprised if gold pulls back down after the Fed meeting. Markets have a
tendency to buy the rumor and sell the news and, in
this case for gold, the rumor is the Fed meeting.
This would make
sense technically also. Often when a stock or a market breaks out of
resistance it pulls back into its base, pauses, and then breaks out again to
begin its real run. I expect this to happen again. What is more, gold stocks
are now overbought:
Just like the
metal, the XAU gold stock index flashed a major long-term buy signal last
week when the XAU/gold ratio broke out of a downtrend resistance line that
goes back for almost two years. Every time in the past three decades when
this type of resistance line has been broken, gold stocks have rallied for at
least six months. This time is unlikely to be any different.
However, I would
expect some sort of pause before we rally much higher. The XAU has gone
straight from 100 to 110 in
the past two weeks. And 110 is resistance that goes back to the Fall of 2003.
The XAU is also
overbought. It is above its bollinger bands and is
also now above the resistance line in its upward trend channel that has been
in place since May. I can see it pulling back to the 102-105 area, then
basing for a few weeks before breaking out again.
I am not selling
my gold stocks. I am holding on and I plan on selling when I get a long-term
sell signal - when the price of gold outperforms the XAU for at least a week.
I am not getting a sell signal now, only a signal telling me that the XAU is
overbought.
But an
overbought signal is not a reason to sell. The big gains aren't even here
yet. We've only seen a preview of what is to come. When the Fed stops raising
interest rates in one or two FOMC meetings after this next one, the price of
gold is going to explode. If gold is going up now on mere 'speculation' that
the Fed may change some of the language in its statement, what do you think
will happen when they actually stop raising rates?
The dollar
hasn't even started to drop yet and gold is going nuts! I think we're going
to see the XAU and gold pause over the next few weeks to digest its gains and
then breakout again as the US dollar tops out and starts a move towards its
80 resistance level into the end of 2005.
The move then in
gold stocks will be incredible. You have no idea how good it can be. Gold
stocks are going to end up trading like Internet stocks did in 1999.
What you should do
now is go over your portfolio of mining and exploration stocks. Don't sell
all of them. Go over them and sell those that are lagging or are questionable
companies with the intention of placing the cash you raise into better
companies over the next couple of weeks.
You want to be
positioned before the next breakout in the best gold stocks so you can fully
benefit from this gain. I plan on picking a few more out once we see gold
make a pullback. It could happen right now or in a few days, but it will
eventually happen. If it does pull back, don't let it scare you! You should
be ready to buy more and build your position up.
To find out what
gold stocks Mike Swanson holds and plans on buying subscribe to his free
Weekly Gold Report at http://wallstreetwindow.com/weeklygold.htm
Mike
Swanson
Editor, Wall
Street Window
Disclaimer: Michael Swanson is the President
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