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More On Gold

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Did somebody say, "moron"? While they didn't really say it, that's what central bankers of the world - mostly the U.S. Federal Reserve want us to accept as wisdom about those who believe that gold is an outdated relic of the past. Oh wait, that's "More On", as in additional subject matter.

But gold, as a relic of the past? Sure. . .only if we block out five thousand years of history and focus specifically on the monetary system since 1973 when the U.S. effectively devalued it's currency by eliminating gold reserves as the backing for dollar- denominated currency. In short, block all rational thought in order to accept modern economists' and the Federal Reserves' belief in gold's lack of importance. If we can't do that - and rational people shouldn't - we must accept that gold, like it or not, is the only "true currency" of any enduring value. Literal paper money creation and electronic fund creation conjured up by all central banks is by definition, "fiat" money.

No that's not an indictment of Italian automobiles or Lira, the Italian currency. The dictionary defines it as, 1) a decree; order; 2) a sanction. In other words, "because we said so".

Federal Reserve notes, aka paper money isn't real. It's government-sanctioned counterfeiting whose attempt to legitimize is based on an immutable rule of law. When the law becomes mutable, and where "full faith and trust in the government" becomes debatable in minds of people whose survival depends on it, you can be sure that some will do everything in their power to convert the fake currency into real currency.

Translation: The Fed is increasing the supply of money with the unintended result that the monetarily-informed recognize the Fed's action for what it is - counterfeiting - and who have taken steps to preserve the value of what they still own. Increasing the money supply is, by definition, inflation.

It should be no surprise then that gold demand is rising as people seek to protect their wealth and keep it from eroding against an onslaught of fake dollars. Take my word for it, the Fed hates this and would love nothing more to see gold banished from the kingdom. No wonder they call it a relic - they'd like us to believe that. Facts suggest otherwise when the dollar is eroding and people seek the protection of gold. Hence, the dollar falls in relation to other currencies and especially gold. People who steward their capital well are merely "stewarding capital well" when they exit dollars in favor of real money.

Don't get me wrong, I'm not talking about anarchy in the morning, or shopping with wheelbarrows of cash for a carton of milk. We're a long way from that. But flight from fiat money into gold cannot be ignored. It is a trend in motion born of a bigger cycle from financial assets into tangible assets. If you doubt that, go back in time and re-read an article penned earlier this year on the subject. You can find it here:

http://www.optioninvestor.com/page/oin/education/traders/2002/05-02.html

That's the big picture. Now follow me into the current conditions of the gold market. I'll keep this short and sweet. The Fed's printing presses are turning out money at an annualized growth rate of 17.4% in order to keep consumers spending. Their hope is that the country will not fall into deflation - "inflate or die' being the secret battle call of the Fed.

Furthermore, there are now 125,000 short commercial gold contracts out there, at least as of December 10th. We won't know the new number until late tomorrow. Anyway, that is a heavy bet by commercials (aka big money institutions) who WANT the price of gold to fall so they can cover at a cheaper price. Still, gold struggles to fall against its primary bullish trend. For the moment it isn't working.

As noted in last week's article,

http://www.optioninvestor.com/page/oin/education/opt101/2002/12-12.html

gold confirmed its primary trend by breaking out of its neutral wedge formed over the last nine months. $330 was the magic resistance level. With 125K contracts short on gold by the commercials, you might think that gold would be turned back from that level after a mild gain - you know, to test the $330 level as a new point of support.

Oops! Those short at $330 pressed their luck, and gold has not come back. Why is that? Well, in my sometimes never to be humble opinion, there are obvious signs, like tire tracks or footprints, that can be nothing but short covering. That's exactly what I think happened. My evidence is as follows. Look at this chart from the February 2003 gold futures contract late last night. As a note for reference, at 4:00 p.m. ET, the gold futures contracts begin trading with the next trading day's date stamp. In other words, "after hours" trades such as those following December 18th's close will show up as December 19th.

So anyway, the chart. . .

February 2003 Gold Futures Chart - GC03G (weekly/daily):

Wow, look at that! The weekly chart has gone vertical, and look at that huge volume, which all took place between 4:00 p.m. ET and roughly 1:00 a.m. ET last night. The major contract purchases were all at the highs of the day where gold actually reached nearly $356, far surpassing the $344 resistance that occurred last June. I had figured $344 would turn the bulls back and shorts would short more at that level, but it didn't happen that way.

No, shorts went nuts in covering, which we can tell from the circled area of the volume chart 7500+ contracts purchased overnight. The norm from the chart appears to be roughly 1000- 2000 per day. There were over 10,000 contracts purchased by the time the clock rolled at today's 4:00 p.m. close.

What I take away from this is that commercials are scared and have, for once, been caught on the wrong side of the trade - a real rarity. They have not been able to repress the power of gold's primary bullish trend. Look for that to continue, but not for long before taking a breather.

While I remain bullish on gold as a long-term investment (and an integral part of Fundamentals Guy's financial ark), I sense there is a short-trading opportunity at hand. Gold has come along way in a hurry and has "gravity play" written all over it. While covering shorts has been the name of the game, shorts may take a more aggressive approach now that price targets have been met. How so?

Take a look at this chart done earlier today in the Market Monitor by John Seckinger. Nice work, John!

February 2003 Gold price target - GC03G (daily):

If the theory holds, the near-term trading top is between $356.60 and $356.80. Gold hit $355.70, which is close enough in my book. On a trading basis, it's nearly topped out and time for a little backtracking. I'd be a long-term buyer again at $330. I'd cover my short with any signs of support at $344.

Already based on tonight's action, price is up after today's close. The point is to trade it right now. Otherwise, this is in my opinion, the wrong time to make a gold investment, as we'd be buying at a temporary top. Patience - let it come to us. But be willing to bet on the primary trend - bullish.

Until next time, and at the risk of offending those who would take the following wish out of the context in which it's intended, make the Merriest Christmas ever for yourselves and your families. It's why we trade. See you next week!

Buzz



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