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The following is an extract from the January 09 Issue of The Global Speculator sent to subscribers on the 12th of January 2009.
As we enter 2009, a look at the performance of key asset classes as well as central bank stimulus activity gives one a sense of déjà vu. If we go back to the 1970’s and take a look at the performance of the All Ordinaries index (green) versus gold (orange) in Australian dollars, we see a divergence as the severe recession of 1973/74 approaches. The stock market predictably falls and gold shines. M3 growth as a 3 year moving average accelerates to peak at 18% by 1975. The stock market slowly recovers and gold accelerates strongly as excess liquidity sorts an inflation hedge.
Fast forward to 2009 and we see a familiar pattern emerging. The All Ordinaries index is falling sharply in the face of a severe recession. Gold is performing strongly and we see money supply growth predictably accelerating to counter this looming downturn. The next 3-5 years will be interesting as the inflationary effect of this stimulus activity starts to bite.
Gold Wave Analysis Update
COMMENTARY
The wave 3 rally is predictably encountering strong resistance on its way to the previous high and then our intermediate term target of US$1,200. Significant resistance will continue to be encountered at US$860 and US$900, with strong support now at US$835. The gold shares continue to perform strongly indicating that this rally is the real thing (see review of the XAU and API below). A recent break out from the downward sloping channel for gold above also supports our argument for further strength.
XAU
The chart below highlights key points in time when the XAU is overbought relative to gold (RSI 30) and oversold (RSI 70). Once the respective indicators trigger (blue vertical lines), it then becomes a task of following trends in the ratio looking for definitive breaks to signify entry (green vertical lines) and exit (red vertical lines) points. The gold price wave analysis above helps us get our bearings. Right now with the commencement of a Wave 3 rally we should expect to see precious metals equities outperform the gold price signaling further strength in the metal.
Gold/XAU Long Term Picture
Gold XAU Ratio
Extreme Key Dates |
Gold/XAU |
XAU |
XAU Performance |
Gold Price |
Gold Performance |
Net Position |
3/11/2000 |
6.07 |
44 |
|
265 |
|
|
25/05/2001 |
4.56 |
58 |
33% |
276 |
4% |
29% |
02/08/2002 |
4.82 |
63 |
9% |
305 |
11% |
-2% |
09/01/2004 |
3.83 |
111 |
75% |
423 |
39% |
36% |
27/05/2005 |
4.84 |
84 |
-26% |
418 |
-1% |
-25% |
17/02/2006 |
3.97 |
139 |
64% |
552 |
32% |
32% |
17/11/2008 |
8.63 |
85 |
-39% |
735 |
33% |
-72% |
Current
(08/01/09) |
7.29 |
117 |
38% |
855 |
16% |
22% |
Gold/XAU Intermediate Term
Commentary
Gold shares have continued to display strength this month versus the metal with a move in the Gold/XAU ratio (lower section of the chart) breaking the long term up trend at 7.50. This is bullish in its implications. A continuation of this trend lower is what we want to see occur over the next few months. This would reinforce the legitimacy of the wave 3 move higher in the gold price.
Closing Comments
Central banks around the world are presently doing everything in their power (as you would expect) to re-inflate the financial system. The trillion dollar question is will it work? When we look back to the 1970’s we can quite clearly see what their objective is. Falling asset prices do not support their cause. The mentality is everything must be done to arrest these falls as soon as possible. The result if “successful” will be a severe inflationary recession! If unsuccessful, we will be looking at a deflationary depression. History has shown that gold and gold equities perform extremely well under each of these scenarios. With an unlimited ability to print money and monetize debt, an inflationary recession seems to be the more likely of these two scenarios.
For anyone interested I write a free newsletter on the precious metals market which you can sign up for at the website below. Past issues of the newsletter may also be accessed at the website below.
Troy Schwensen
Research Analyst
www.goldnerds.com.au
Editor
The Global Speculator
***
Disclaimer: This publication has been prepared from a wide variety of sources which the editor to the best of his knowledge and belief considers accurate. The editor does not Warren the accuracy of the information and forecasts contained in this publication. This information is provided for educational purposes and nothing written should be construed as a solicitation to buy and sell securities.
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