Every once in a while, usually early in the morning after gold has been beaten down on the GLOBEX, you'll catch a glimpse of an article detailing how gold fell as a result of dollar strength. It's a half truth. Although the US Dollar Index has rallied from its 92.37 low to 99.50 early last week, gold has spent the last two months rallying against all the major currencies, including the U.S. dollar. So much for gold's rise being attributed to a weak dollar. Likewise, gold stocks have been rallying along with the stock market since the early March lows. If you listen to CNN-FN, you can't help but know that the NASDAQ has rallied almost 45% since making its Bear Market low in March. That's a great spurt by anyone's standard ....... unless, of course, you use a gold standard. One of the best kept secrets around involves the fact that the AMEX Gold Bugs Index (HUI) has rallied more than 67% over that same time period. Now that gold has closed at a new high for this move up, I believe that the best is yet to come.
Physical gold is about to enter its most critical phase of the current move up. It will begin as soon as we close above US $380.00 in the DECEMBER GOLD futures contract and it will end when we top out at $408.90, $427.00 (which is my guess), $490.50, or where ever. I also believe that the move from $380.00 to our top will be completed in a relatively short period of time, possibly within three weeks. I originally thought the move up would require more time as I looked for a top on or about October 18th.
Assuming we reach a minimum of $408, it will be an important milestone for three reasons:
* It's the first time that gold will have a close above $400 in more than seven years.
* The first phase, or accumulation phase, of the gold Bull Market will end and we will enter the second phase where the funds and large brokerage firms begin to buy and recommend gold, and
* It will, in my opinion, mark the beginning of a transitional phase whereby people stop thinking about gold as a commodity and start to see gold for what it really is, i.e., money.
That's a very important leap of faith. You see, the price increases of commodities are limited by supply and demand along with a hundred other things. Money, on the other hand, is a store of wealth and has no such limits. That's why wars have been fought over it. Why and how is such a transition possible? It all has to do with the fact that almost every major economy in the world is printing money like its going out of style. Even the normally conservative Swiss are printing Francs at an annualized growth rate of 14.7%, but that's nothing compared to places like Japan or some of the other Asian countries.
The logic behind such as strategy is as follows: the Japanese print Yen and use them to buy dollars (or U.S. bonds) on the foreign exchange markets thereby weakening the Yen in terms of the U.S. dollar. As a result of a weaker Yen, Japanese export goods become cheaper for American consumers. If just Japan engaged in such a strategy, you might expect some degree of success over the short and medium term. The problem arises when everyone does it; the print until you run out of ink concept turns into a recipe for disaster. Japan, along with any nation embarking on such a policy, ends up with a glut of production and the American consumer ends up in bankruptcy court. In short, I've sacrificed my tomorrow in order to live well beyond my means today. That's where gold steps into the picture and reaches prices that we can't conceptualize right now.
Like it or not, the U.S. dollar is going to devalue. Two years ago I told you that I expected to see the dollar trade one-to-one with the Swiss Franc, and that's if the wheels don't fall off. If we were to fall into a 1930's style Depression, the dollar could very well go the way of the old German Reich marc or the Peruvian Inti. I remember paying five million Intis for a Happy Meal at McDonald's. In the time it took to leave the house, drive to the restaurant and pay, the Inti would devalue one-half of one percent against the dollar. In retrospect, it seems kind of funny now but I wasn't laughing back then. I don't think this is something the average American is going to handle well emotionally. You might say that we're going to have a little bit of a problem.
In closing, the mining shares have been and continue to lead the way up but I look for them to slow down in another week or so and gold will go it alone until it exhausts itself and the inevitable correction begins. I suspect the correction will find a base around $370/ounce as the last one's in will be the first one's out of the market. What's more important, gold has been undergoing a 'quiet' accumulation by so-called smart money for well over a year now and this money won't exit in the face of such a correction. Instead, it will look at this decline as a last chance to buy gold and its related stocks on the cheap. I will lighten up on my futures contracts and exit some of my stock but I will not sell everything. I'll have more on this next week. In the mean time, you have to be patient!
