Gold in a Bull or Bear Market?

By: Brian_Bloom

First off, let me declare that I am not a congenital bear on gold. Fundamentally, I am convinced that gold is the most valuable commodity on the planet. I just happen to believe that it never was nor ever will be a currency. I hold this belief because the evidence seems to me to point to this conclusion, not because I have some deep seated drive to challenge the combined views of the gold community.

Of course, gold has also been a medium of exchange over the years, but Joe Bloggs never used gold to buy his daily bread. And the word currency is derived from the word “current” – which is another way of saying “immediate.” The facts suggest that the average person never has and never will walk around with gold coins tinkling in his pocket waiting to be spent on day-to-day consumer goods.

Unfortunately (or fortunately, depending on how you look at it) what I think about values is irrelevant. The market tells its own story and anyone who thinks he is cleverer than the market is not clever at all. It is a particularly foolish pursuit to try to argue with the markets.

There are those who are perma gold bulls who argue that gold is the currency of last resort. I subscribe to this argument, but largely because gold is a store of value. In times of fear and when confidence in the integrity of the financial system wanes, it is natural that people should seek to preserve wealth, and owning gold is one way of doing that. From that perspective, gold represents an insurance policy. That is the perspective from which I personally view gold in the short term. Typically, one only commits small proportion of one’s wealth/income to pay for insurance.

But, the ultimate value of gold is what you can get for it when you try to sell it. Everything else is theoretical. Let’s be honest with ourselves: How can those who argue that gold is the currency of last resort just dismiss the chart of the US Dollar below? (Courtesy decisionpoint.com). If the US Dollar moves inversely to the gold price (and vice versa) and if the US dollar is in a bull trend (albeit short term) then how can the “gold is currency” camp justify a rise in the gold price? Gold either is a currency or it isn’t. If it isn’t and its price is rising, then the reason it is rising will revolve around its inherent fundamental value – and we are probably 5-10 years away from the dawning of a widespread recognition of its inherent fundamental value.

On the other hand, if it is a currency of last resort, and if the US Dollar Index is rising, then one would expect the gold price to fall.

There are those who would argue that the PMO is overbought and that the price should pull back. They will be right on the former observation, but everything is relative. Arguably, the PMO could keep rising. There is no theoretical upside limit. Why not 2 or 3 or 4?

The relevant facts inherent in this chart are as follows:

The 50 day moving average is approaching the 200 day MA (from which it might well pull back)
The 200 day MA is pointing upwards – which does not easily reverse itself
The Preferred Gradient of incline has changed and the index is now outside (and above the confines of the rising channel)
A rising pennant within a rising trend is technically strong

Interim Conclusion

The short term prognosis for the dollar is strong. Those who argue that gold is the currency of last resort cannot have their cake and eat it. If they are right, then a strong dollar implies that the gold price will weaken (at least in the short term).

If we look at the daily price of gold, those who believe in the PMO as a trading indicator will be arguing that gold is oversold – and they will be right. The PMO certainly looks like it wants to turn up.

Again, unfortunately, this is occurring within the context of a downward pointing 200 day MA and a 50 day MA which is approaching the 200 day MA. Could gold turn up from here? Of course it could! But, Ahhh those day traders who are slavishly following their trading indicators. The time will inevitably come when they too need to be parted from their money. They will very likely be ignoring the fact that the price is quite far below the 200 day MA.

They will probably also be ignoring the fact that the PMO on the monthly chart below (which stands at 15 and not 1 or 2 or 3 or 4) looks like it wants to turn down

Conclusion

On balance, it seems prudent to pay attention to the apparent (and as yet inexplicable) strength of the US Dollar.

Question: How can the Dollar be rising if the yields in the USA are weak?

Answer: It’s relative. If the yields in the US’s trading partner countries are relatively weaker, then the US Dollar index might rise because it is less undesirable a currency than the others.

It therefore seems prudent to be circumspect about gold at present. After all, for some months now we have been a frame of mind which has been skewed towards wealth protection rather than wealth building.

By Brian Bloom

You may now order your copy of Beyond Neanderthal from www.beyondneanderthal.com . My guess is that we will both be glad you did. The feedback from readers has been very positive, and I am grateful for that. Via its light hearted storyline, the novel points a direction as to what we should be doing in the event that global cooling starts to manifest; and it also sows some seeds of ideas on how we might defuse the clash of civilisations

Copyright © 2008 Brian Bloom - All Rights Reserved

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

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