Moneyization: The global financial
phenomenon of individuals and businesses moving their
funds to monies in which they have the highest confidence,
or money in which they have a higher store of faith.
Or, Catching Up & Calming Down
Many recovered more quickly from Hurricane
Wilma. Having eight days of no electricity put a bigger
hole in our productive activities than expected. More
than a couple weeks were required to return the human
schedule to some kind of normality. Just last week I
was able to say that most of the “holes”
had been filled in, and progress could again be made.
For that reason, this writing is in part intended to
catch up. Additionally, some investors need to calm
down and not allow the speculative juices now running
through the markets to drive their activities.
Buying motivated by a fear of missing
out on a market move has never been productive. Successful
investing is built on buying low, when few want something.
Such is not the case today in the Gold market. While
the longer term positive outlook for Gold to rise above
US$1,300 is regularly confirmed by the news, every day
is not a “buying day.” Some days are just
Rarely have so many reasons coexisted
at one time to motivate buyers of Gold, and the other
metals. The following are a sample of the many factors
that have been joined in time to give us $Gold at more
than $500. No intention exists to say that any one is
a particular problem, but rather that a long list of
buyers have come into the Gold market in a short time
span to create an over bought situation.
- Investment managers are busy window
dressing their client accounts. Many have not owned
Gold in their managed accounts. Few want to send out
December statements without some exposure to the precious
metals. The calendar is helping in another manner. The
investment community starts winding down for the year
in the first weeks of December. Tax loss selling has
been completed and the moneys have been repositioned
to convince clients how well their money is being managed.
In short, the period of maximum flow from this group
is now being felt in the Gold market.
- Federal Reserve watchers, not all reading
the signs the same, are also shifting to Gold. These
handicappers of Fed Res policy are divided into two
groups. First, some think the Federal Reserve is close
to the end of the interest rate raising cycle. To them,
lower interest rates are just a matter of time. Such
a development would be bearish for the dollar, and makes
buying Gold a good idea. Another group reads the minutes
of the FOMC and focuses on concerns of higher inflation
ahead. This latter group is motivated by those worries
to buy Gold.
- CNBC discovered Gold. When trading below
US$300, we were Gold Nuts. At $500, Gold deserves a
panel discussion in the morning. That talk certainly
has created some buying by those that let CNBC manage
their portfolios. Course these discussions are fitted
in between reports on Google. Google vs. Gold, seems
almost like a title for a Japanese monster movie of
times past. As long as the investment merits of Google
at recent prices are still being discussed, Gold is
a safe longer term holding. The media attention has
certainly attracted some that are afraid of missing
- Momentum players have watched
as the back testing of their profit matrixes created
buy signals on Gold. These traders would not touch Gold
below $400, but the move above $475 was a buy signal
to these gamblers. Understanding momentum investing
is important. A momentum investor sees four red numbers
in a row at a roulette wheel as a sure sign that red
will keep coming up. Would you bet with them?
- The nominee for Chairman of the Federal
Reserve, Bernanke, will likely be as good for Gold as
the outgoing Chairman. Benanke’s Delusion and
Bernanke’s Illusion will serve as foundations
for monetary policies that will likely enhance the price
of $Gold. The new Chairman will build on the view that
Federal Reserve policy has not been faulty over the
past many years. Bernanke is President Bush’s
gift to Gold investors. Thank you, Mr. President!
- Federal Reserve policies continue to
be supportive of higher future inflation. Higher oil
prices have been monetized by the Federal Reserve. $60
oil and higher prices for other commodities are slowly
working their way through the global economic system.
The year-to-year change in the U.S. CPI has broken out
of a ten year trading range. The Federal Reserve, though,
continues to view all these developments as exogenous
factors not influenced by the policies of the central
bank. This mistake has been made before.
- Gold has demonstrated price strength
in many national monies. That development has convinced
many of a new bull market in Gold on global basis. This
global Gold rally is an exciting example of the moneyization
phenomenon, where people shift to money, Gold, in which
they have a higher faith. National monies, on a global
basis, are losing value as a consequence. Another view
might be that the shift, in process since 2000, away
from paper assets to real assets has accelerated as
real returns have been superior to paper returns.
- Central banks around the world, following
the lead of the Federal Reserve, have created unprecedented
amounts of liquidity over the past decade. When that
liquidity was being stored in U.S. government and agency
debt the potential to influence prices was minimal.
With the tendency to invest money away from the US.
dollar, that liquidity is pushing a broad array of prices
higher. Gold, oil, commodities, paper stocks, housing
and others prices are rising as that liquidity is now
being freed from the shackle of U.S. debt. That unleashing
of liquidity may be having an inordinate impact at the
present time on Gold’s price, and the prices of
U.S. equities. Such a development increases short-term
price risk without disturbing the long-term dynamics.
- The U.S. dollar has passed through a
period of high relative pessimism which has normally
been associated with an overbought Gold market, and
a likelihood of a correction within the context of a
longer term bull market. This situation can be observed
in first graph. The solid line is a stochastic like
measure built on the relative ranking of the U.S. dollar
versus nine major national monies. This measure is plotted,
using the right axis, as an oscillator with 0% representing
maximum pessimism and -100% as maximum optimism. Such
a plotting convention allows more ready comparison versus
the $Gold price. Line of triangles is the $Gold price,
using the left axis.
The previous major warning from this measure
was this past summer when over optimism on the dollar
was indicated. That condition suggested a shift toward
less optimism, or more pessimism. Higher $Gold prices
were expected in that situation, and higher prices did
occur. At the present, while short of a maximum negative
reading, the measure is suggesting that $Gold will weaken.
While the U.S. dollar remains in a longer term bear
market, pessimism has passed trough an extreme level
which pushed Gold prices to today’s higher price.
Based on this measure some consolidation is likely.
Too much optimism on Gold is built on too much pessimism
on the dollar, in the short-term.
The attitude of the world toward the longer
term prospects for the U.S. dollar remains negative.
Concern here is that the dollar is now at the lower
edge of the bear market channel and is likely to bounce
to the upper boundary of that downward sloping channel.
That development could create some short-term price
consolidation in the Gold market. Longer term the growing
negative view of the world toward dollar investments
should support optimistic forecasts for $Gold’s
price. This trend toward a collective negative on the
U.S. dollar can be observed in the second graph.
Each week the Federal Reserve releases
data that includes holdings at the Federal Reserve of
U.S. government and agency debt in accounts for foreign
official institutions. This report provides the most
timely data on the investment of dollars back into U.S.
debt. Last week these holdings amounted to $1.5 trillion.
Plotted in the second graph is the slope of a regression
line on that data on foreign official institution holdings
of U.S. government and agency debt. For those with a
mathematical leaning, it is the “b” in y
= a + bx regression line where y = holdings of U.S.
debt. In short, this measure gives an indication of
the trend in these holdings.
While some may have forgotten that topic
from long past courses in math and statistics, the interpretation
is fairly easy. If this measure is positive, foreign
official institutions are still increasing their holdings
of U.S. government and agency debt. If the measure is
declining, becoming less positive in this case, the
rate of acquisition is slowing. This plot should give
us an early indication of when the selling might start.
That day when global investors tire of losing money
in the U.S. dollar is coming if this trend continues
At present the plot remains positive.
Foreign official institutions are still buying, but
at a slower rate. Since the hemorrhaging of dollars
by the U.S. in the form of the trade deficit continues,
excess dollars are being spent or sold rather than reinvested.
That tendency to shed dollars puts pressure on the dollar’s
value and pushes up the price of $Gold. Such a development
has contributed to the recent $Gold rally, and is the
foundation for the long-term dollar bear market and
bull market in $Gold. However, these foreign official
institutions have not started selling dollars. That
action, when it develops, will be what propels $Gold
to over US$1,300.
The longer term case for Gold remains
well intact. Concern here is with the tactical moves
of investors, or how they should deal with the daily
and weekly price movements. As shown in the third chart
by the oscillator at the bottom, $Gold has risen to
an over bought extreme. Timing your purchases to make
greater profits simply makes sense. And note, we are
referring to the timing of purchases. One should not
sell in a bull market.
Source: The Value View Gold Report
The indicator in the $Gold graph suggests
that $Gold may be preparing to start a consolidation.
An overbought reading on this oscillator continues to
persist. Speculative juices now running rampant will
exhaust themselves at some point, and prepare the way
for another profitable buying opportunity. Those wishing
to buy $Gold should be accumulating cash, selling U.S.
equities for example, in preparation for the next buy
signal on this indicator.
While Gold has done well in dollars, $Gold
is not the only price that has come alive. Gold in both
Euros and Canadian dollars has been strong. This development
can be seen in the last two charts. These charts also
include the oscillator for over bought/sold to help
investors denominated in those monies to make more timely
purchases. These charts are new to THE VALUE VIEW GOLD
REPORT so historical buys that might have occurred are
not plotted beyond the last signal.
Source: The Value View Gold Report
As shown in the €Gold graph, the
movement of €Gold above €400 really lit the
belly fires of speculators. Breaking above US$300, way
back when, did nothing, but this did. Investors in a
host of national monies took notice. Gold’s brilliant
fire suddenly burned bright for a far larger spectrum
of investors. Some had expected $Gold to rally, but
the €Gold move was not foreseen. Politics in the
EU, French riots and the Jordan bombings reminded Euro
investors of the need for real money in their portfolios.
Canadian $ Gold
Source: The Value View Gold Report
As shown in the Canadian $ Gold graph,
CN$Gold joined in the move. Gold moving above CN$560
was like a flame to a moth. Canadian investors have
a long history of moving out of their national money.
They should continue to use the over valued Canadian
dollar to buy Gold when conditions are right. While
the Canadian dollar has appreciated against the U.S.
dollar as one economic consequence of the Patriot Act,
the trend in CN$Gold clearly showed another picture.
Canadian investors should be wary of the paper money
illusion, and move to Gold when profitable buying opportunities
However as can be seen in these graphs,
Gold in both national monies has moved well into an
over bought condition. Investors in both nations should
be restraining purchases at this time. A better purchase
price will develop. Always has! Both CN$Gold and €Gold
will again move to over sold prices. Investors denominated
in these national monies should also be preparing for
future buying opportunities, rather than “chasing
A caveat in all this seeming rationale
thinking does exist. Markets discount the future, not
what we know today. The world has a massive investment
in U.S. dollar denominated assets. Much of the global
economic machine is dependent on the U.S. consumer spending
binge. U.S. consumption exceeds income. Negative savings
is the term applied to that situation. To date, that
deficit has been financed by converting equity in homes
to cash. Should U.S. consumers not have access to that
source of cash, spending would fall by more than$500
billion. The U.S. dollar would plunge. 1930 would by
contrast look like a spring picnic. Is the Gold market
telling us something?
Ned W. Schmidt,CFA,CEBS is publisher of
THE VALUE VIEW GOLD REPORT. That report
now includes a weekly message, TRADING THOUGHTS,
to help investors identify timely points for buying
Gold and Silver. You can join him for the Gold Super
Cycle at http://home.att.net/~nwschmidt/Order_Gold_EMonthlyTT.html
His monumental report, "$1,265 GOLD",
which has now been read in 12 countries, has 255 pages
and 98 graphs, is available at www.amazon.com
or from the author. Ned welcomes your comments and questions.
His mission in life is to rescue investors from the
abyss of financial assets and the coming collapse of
the U.S. dollar. He can be contacted at firstname.lastname@example.org.