Gold Still Appears To Be
the Ultimate Currency
By Przemyslaw Radomski, CFA
The Dow Jones
Industrial Average climbed a steep wall of worry and last Tuesday returned to
its all-time high from late 2007. The Dow finished at 14253.77, topping
the previous record set in October 2007 and is already up 8.8% for the year. The
Fedís expansive monetary policy to prop up the economy has kept stocks climbing
higher despite a less than glowing global economy. By pumping trillions into the
financial system, the Fed has convinced investors it will provide a safety net
for future shocks. In addition, by keeping interest rates extremely low, the Fed
is forcing investors to seek higher returns in the stock market.
press is hailing it a historic day.
But we suggest
stopping a moment before chilling the champagne. Despite reaching its all-time
high, the stock market has provided investors with zip, zilch, zero return over
the last five and one-half years. The Dow has just gotten back to where it was
in October 2007 and many investors are still struggling to make up their losses
after the credit crisis that erased $37 trillion from global equity values. When
the housing bubble burst in 2008 the DOW plunged 34 percent in 2008 for the
worst performance in 77 years.
During the five
and a half year period since the crisis, gold has provided a return of
We donít mean to
dump cold water on the celebration. We just want to keep things in perspective.
Once we factor in inflation over the past few years, the all-time high looks
less convincing. With consumer-price increases removed, the Dow has not been in
real record territory in more than 13 years. A
Wall Street Journal article contends that
the last real, or inflation-adjusted, Dow record was on Jan. 14, 2000. Since
then it looks like the Dow has risen 22% if you donít take inflation into
account. But if you do, Tuesdayís high is still more than 10% below that record.
is just 9256.38 once inflation is removed. That doesn't even match the
inflation-adjusted high of 10194.80 hit in 2007 Ė and weíre only taking the
official inflation numbers into account here. And it is far from the real record
of 10424.28 hit Jan. 14, 2000, according to calculations by Bespoke Investment
definitely something to take into account when investing to meet future needs.
Central bankers can print all the fiat currency they like but they canít
manufacture gold. Its supply is more or less fixed (discoveries are made, but
you canít suddenly increase gold production by 500% and you can do that in case
of fiat currencies). It cannot be inflated by central banks, which is why it is
inflation hedge and the ultimate
alternative currency (or the only true one). The reason a glass of soda cost a
penny in the beginning of the last century and now costs several dollars is not
that soda water was cheaper then, but rather that the dollar had more value.
Some of the big
hedge funds still are betting on the price of gold, even though a large number
have sold most in the last quarter of 2012 (who knows if that happened in the
past few weeks when volume was so highÖ), if not all, their shares in SPDR Gold
Trust ETF (GLD -0.09%). Hedge fund manager John Paulson and his firm, Paulson &
Co., remain solidly in the gold camp. Paulson continues to hold the largest
position in GLD with nearly 22 million shares, worth an astonishing $3.344
Letís see whatís
next. Weíll start the technical part of todayís essay with the analysis of the
USD Index medium-term chart (charts courtesy by
thing to discuss here is the
head-and-shoulders formation. This
trading pattern has bearish implications
for the USD Index and the question now is whether the formation is still present
given the recent rally. We feel the answer is ďyesĒ, because even though the
index is now higher than the level of the left shoulder, the full formation is
simply a bit skewed.
have been a bit higher each time so it is perhaps quite natural for the second
shoulder to be above the first shoulder. Consequently, the formation could still
be completed - though not yet - the other shoulder has yet to form. Declines in
the index are needed for this to happen, and we feel this could still be seen.
Letís take a look
at the intermarket correlations to see how this rather bearish outlook for the
dollar could translate into gold and silver prices.
Matrix is a tool which we have developed to analyze the impact of the currency
markets and the general stock market upon the precious metals sector, (namely:
correlations between gold and other
assets). The precious metals and the USD Index show a strong,
negative correlation for the past 30 days. In the last several days however,
gold prices did not continue their decline, that is, did not respond to the USD
Index strength. This is a bullish combination and provides an indication that
gold prices will rally if the dollar declines significantly (!). It also
suggests that additional small (!) daily rally in the USD Index may not really
hurt the price of gold (just like it was the case on Friday).
Speaking of gold,
letís take a look at the yellow metal from the long-term perspective.
In this chart,
very little change was seen, compared to two weeks ago. Goldís price moved $0.10
higher last week, an increase of 0.01%, basically flat. With USD Index values
moving up a bit last week, the situation isnít all that bad here. It seems that
gold prices bottomed in late February by correcting to the declining support
line seen on the above chart.
continue to describe the situation as very similar to 2008 when a major bottom
formed. Back then, it took just a few months for gold to rally from about
$700 an ounce to $1,000 an ounce. If a similar percentage increase is seen this
year, gold could rally to $2,250 in just a few months (thatís not our
official target, though). This appears possible based on the
cycles still present here as indicated by
the vertical lines in our chart.
although the cyclical turning point has passed for the USD, it still seems as
though the index will soon reverse and move to the downside as it is now
considerably overbought on a short-term basis. If the coming decline turns into
a bigger one and the medium-term head-and-shoulders pattern is completed, it
will likely translate into higher gold and silver prices. For now the bullish
piece of information is that gold doesnít seem to react to daily rallies in the
poised to move to the upside but the exact timing of such a move is still not
crystal clear. Some indicators point to higher prices quite soon, thereís a
possibility of a very sharp rally over the next few months, and itís also
possible that nothing major will happen for a week or two.
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Thank you for reading.
Have a great and profitable week!
Gold & Silver Investment &
Trading Website - SunshineProfits.com
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Seeing is believing.
All essays, research and information found above represent
analyses and opinions of Przemyslaw Radomski, CFA and Sunshine Profits'
associates only. As such, it may prove wrong and be a subject to change without
notice. Opinions and analyses were based on data available to authors of
respective essays at the time of writing. Although the information provided
above is based on careful research and sources that are believed to be accurate,
Przemyslaw Radomski, CFA and his associates do not guarantee the accuracy or
thoroughness of the data or information reported. The opinions published above
are neither an offer nor a recommendation to purchase or sell any securities.
Mr. Radomski is not a Registered Securities Advisor. By reading Przemyslaw
Radomski's, CFA reports you fully agree that he will not be held responsible or
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