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
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 “watching
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 the move.
- 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
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
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 to deteriorate.
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
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 develop.
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 email@example.com.