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Gold Revisited (Again)

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Gold Revisited (Again)

A funny thing happened on the way to the FOREX. If you are wondering what the FOREX is, it's the foreign currency exchange. That's where Yen and Euros get traded for Dollars, and to a lesser extent, India Rupia get traded for Dutch Guilders. OK, here's the funny part. There is not a single currency traded today that is even remotely tied to the price of gold, as currencies once were. So what?

The big deal is that consumers - bless their open wallets - are spending their brains out. But they are not doing it with hard- earned money. They've taken the easy way out and borrowed themselves into prosperity! Or at least they feel that way. $0 down, 0% interest, and 0 payments for one year is almost like getting a new car for free. Except that eventually, we have to pay for it. For much of America, the $400 payment foregone now will be an incredible burden in 2004.

So why is this possible? The simple answer is that the Fed has been waging a fierce battle against deflation by inflating US currency supplies. It's all been in an effort to keep borrowers from defaulting, as their assets deflate in value. Thank God for the Real Estate Bubble that has allowed the average citizen to refinance and suck some cash out of his/her property - cash spent on a vacation or other consumable, but not invested. Here's a concept: How about we refinance at a lower rate and merely pay off the loan faster instead of splurging?

Bringing this full circle, the only reason that consumers have $$$ to spend is because they borrow from the future. That pot from which borrowed money originates is the U.S. Federal Reserve, which, thanks to the obsolescence of the printing press, can now electronically "print" money in the form of new credit.

If you are now thinking back to basic economics where you learned about supply and demand, by now you've recognized that a flood of Dollars into the economy is a recipe for inflation. And thus we have an epic battle on our hands of the Fed's "Inflate or Die" mantra vs. world deflation born of overcapacity, especially in China. I don't know how this will turn out in the near term. But I do know that eventually, when a central bank floods money into the system, inflation results. It's only a matter of time.

Now that we know that, is there anything we can do to protect ourselves? Yes. Consider gold. Gold is the only "real" currency to withstand the test of centuries and even millenniums.

But please do not misinterpret my motives here. This does not mean that Fundamentals Guy has become a gold bug nor am I recommending you dump everything else and sleep with your newly purchased metal under your mattress.

Here, I'm keeping completely in the tradition of Fundamental's Guy building his financial ark. Minus the Gopher wood used by Noah to build his ark (Nobody really knows what gopher wood is anyway), gold is a part of my financial ark. Right now, I actually own the shiny yellow metal in coin form as somewhat of an insurance policy in case the world, shall we say, becomes a bit more chaotic.

While I don't envision waking up tomorrow to find my Federal Reserve notes have no value, history shows that fiat (aka fake) money will always be replaced by real money, and that's gold. I can spend it if grocery shopping requires literal wheelbarrows of cash like in early 20th century Germany. Talk about value erosion of the currency! Plus, if it gets to that point, I won't have to worry about my paper depreciating. My gold still buys the same goods, if not more.

So anyway, what has tripped my trigger to revisit gold again as a diversified investment/insurance policy/ark material? Well, it's tradable. It's investable. And I believe gold is at the cusp of confirming its entry into a long-term secular bull market. While the major indexes have lost something from 15%-25% in value this year, gold is up about 10%. Don't buy it now, but look at the charts - first, the point and figure chart for the gold futures composite. It's a conglomerate of the gold futures prices back to 1990 that separates futures contracts expiration away from the contract price. All that's left is price.

PnF Composite Gold chart ($GOLD):

What's great about this chart is that it's from December 11th, yesterday, which alone, was enough to get the breakout. Today, the price was even higher at a close of $332. While we don't see it on this point and figure chart, $330 resistance that we would see on a candle chart was broken, and the futures volume of February, 2003 contract (GC03G) was huge - not just traders rolling out of December '02 contracts, but real buying interest. Interest, as defined by volume was clearly there. Check it out on the following chart.

February Gold chart - GC03G (weekly/daily):

OK, that looks good breaking out over $330 on the weekly and the daily charts. The daily is about a one-in-a-thousand chart that shows its 200-dma on a steady incline too. MACD, which I don't usually watch, is turning up as well. In my opinion, the bull is confirmed for the yellow metal, though it's been an erratic ascent.

Now get this. DON'T buy it now just because you read about it here. For while the chart action has been nice, after a big run- up, it always pulls back. If you want some gold, PnF pullbacks to $316 would be buyable in my opinion. Nearest price target is $344, with every expectation, given the confirmed bull market in gold that gold will eventually exceed that level. For quicker trades, $325-$326 is another point of support.

Unfortunately, I got a late start. Meanwhile I had every intention of drilling down into a potential play. So it will just have to wait until next week.

Again, all we saw yesterday and today was a confirmation of a bullish gold market. The good news is that we don't need to chase it. The train is not leaving the station without us. Recent action has merely given us a basis to make a bullish entry on any pullback. We will see a pullback.

For those who want to venture forth in a research exercise, take a look at Newmont mining (NYSE:NEM) and the XAU (INDEX:XAU.X). You will see the bullish action there too. But I can't emphasize enough the need to be patient and wait for this one to come to us. No chasing! Got gold questions? Send them in! I may not be able to get to all of them. But I'll do my best to address those most focused on education and financial character.

Until next time, make a great weekend for yourselves!

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