THE VALUE VIEW GOLD
HEADLINE from 8 Sep 2004: "Electricity On"
Boca Raton: On the afternoon of this day the electricity
was restored to the residence of the author. A happy
moment was that. More than two hundred thousand others
remain unlucky. The next day a cold drink was enjoyed,
right out of the refrigerator. After five days without
power, the experience was better than you know what.
Now, how do we get the salt to flow out of the shaker
Hurricane Frances should be a good lesson for people,
and perhaps one that investors might remember. Nothing
created by mere human beings can accurately predict
a storm, change its direction, or mitigate its wrath.
Forgetting those lessons should only be done with ready
acceptance of the associated risks. Nature is stronger
than mankind, and does what it does without consideration
of human efforts.
In our human world, global financial and goods markets
exist. In the United States the Federal Reserve is run
by individuals that believe they are smarter and faster
than global markets. Their actions, they believe, can
forecast accurately, contain, and control world financial
markets. They may learn that "Mother Nature"
is more powerful, but only after the damage is done.
Across the sea, the Euro is building mass. Behind it
will soon be a bigger economy with more people than
the United States. Their current account surplus will
need to be invested. The day when Euro denominated individuals
cease humbling themselves to the U.S. dollar is on the
calendar, though we may not know that date. Europe's
cash will ultimately be an important influence on the
denomination of international financial assets in the
years to come. The dollar will no longer be dominant,
but have a shared roll. This coming monetary tidal wave
will wash away dollar holders in a not unprecedented
manner. (Weather and water metaphors just come out this
The gurus on Bay and Wall Street talk about the vitality
of U.S. growth and the absolute importance of the U.S.
economy and financial markets to the world. They contend
that the U.S. economy and the dollar will remain supreme.
A hundred years ago, they would have made the same argument
for the British economy and the pound. They have forgotten
that "Mother Nature" dictates whether or not
the electricity is on, not computer models in their
offices or at the Federal Reserve.
Canadian politicians and pseudo flag wavers, and in
Mexico, dither over the idea of a North American currency
union. Recent strength in the Canadian dollar has relieved
the pressure on these myopic monetarists. A symbiotic
relationship requires that the primary host remain healthy.
When the U.S. economy pays the price for the Federal
Reserve's bubble approach to managing the economy, the
Canadian situation will not look so good.
Canadian investors should ask themselves an important
question. When the Euro is worth US$3.00, what will
the Canadian dollar be worth in Euros? Focus on the
true matters, not the market noise.
Before talking about fundamentals let us turn to one
of the better rules of technical analysis. A problem
with using computers is one no longer becomes intimate
with the data. In the days when we plotted on paper,
the analysts developed an awareness of the data in a
special way. Each point had to be put on the chart by
hand. Relationships, and especially the way they developed,
just seemed more real. An analyst came to meaningful
understand what was happening.
That fairly reliable rule dealt with attaching the next
sheet of graph paper. When the analyst got to the edge
of the graph paper, another had to be taped to it. The
direction in which one affixed the next sheet of graph
paper was a fairly reliable indicator of the future
trend, or direction, of a market. May sound simplistic,
but a wet thumb does tell one from which direction the
wind is coming just as well as expensive meteorological
In the First Graph we are approaching perhaps the need
to attach another sheet of graph paper. That chart covers
the last fifteen years of monthly US$ Gold. Should we
see the need to attach the "next page" at
the top, a fairly strong indication of the future direction
of Gold will be given. Besides, "breaking out"
to the upside on a fifteen-year chart would seem to
convince even the most skeptical of observers.
Patience, though, seems reasonable. Many may be anxious
that Gold has retreated from the high, and seems to
be without a trend. Breaking out into new territory
is not easily done. With no overhead resistance evident
in this fifteen-year history of trading, moving into
that higher territory is likely. Immediate gratification
does not happen in markets. Have a little patience,
your reward for moving out of paper assets and into
Gold is on the horizon.
Recent market weakness is in part due to the U.S. dollar
performing better. Of course too, many market participants
trade under the delusion that they can predict the future
for the U.S. economy, the European economy and the price
of oil. The second graph shows the cumulative change
in the official holdings of U.S. government debt since
the middle of May, and each bar represents a weekly
plot. Since mid-May, foreign central banks have purchased
almost a hundred billion dollars of U.S. debt.
That is a massive ticket, almost one quarter of the
U.S. government annual deficit. Little wonder the dollar
has had a little strength. If one does not own Gold,
a bet is being made that these purchases by foreign
investors will continue indefinitely. That wager is
like assuming that the storm will never come ashore
in your direction.
As discussed in our last article though, these accumulations
build up. The value of this burden is rising to a level
that is excessive. Too much supply will result in the
value, or Gold price, of that debt being pushed down
by the markets. That can be accomplished only by an
increase in the dollar price of Gold. (Readers not familiar
with previous article should read it for a complete
understanding of this phenomenon.)
One of the old college jokes is about the difference
between research and plagiarism. Plagiarism is taking
material from another author. Research takes ideas from
more than one source. For the fourth graph we are indebted
to articles by Martin Wolf in The Financial Times. Martin
is unique in that he is one of the few journalists that
actually understands the subject about which he writes.
He has a new book out on globalization which is recommended
for those that want a fuller understanding of the matter.
Portrayed in third graph is the ratio of the value of
U.S. imports to the value of exports. If the ratio is
rising, the nation's level of imports is rising faster
than it exports. Yes, that is the pesky trade deficit
about which we worry. Note that in the early part of
the graph the line moved in a lateral pattern. U.S.
imports and exports were moving in conjunction with
Then the ratio rose in the 1990s. The good time era
of the Greenspan Stock Market Bubble prosperity created
a taste for imported goods. That false prosperity caused
imports to begin an era of a serious imbalance with
exports. The ratio then turned flat far a while. After
the stock market corrected for the Federal Reserve's
hubris, a recession developed. The ability of the former
rich to import fancy goods faltered. The Fed, apparently
worried about the economies of the rest of the world,
lowered rates. In the latter part of the graph the ratio
is again rising, and foreign producers were saved. A
Housing and Mortgage Bubble is financing again the importation
of massive amounts of goods.
Make sure before going on that you understand two of
the implications of this ratio. First is that U.S. consumption
is above the country's productive capacity. Those excessive
purchases are now financed by borrowing from foreign
investors. Should the Federal Reserve be forced to finance
them, that inflation all have been anticipating will
Second, that imports are rising faster than exports
means the U.S. dollar is over valued. That means that
Gold is under valued. The U.S. dollar, during this period,
has been able to buy too much Gold. This concept of
the dollar over valued implying Gold undervalued is
a concept more have come to recognize. As an investor,
this concept if fundamental to your understanding.
Two other factors are also at work here. Space does
not permit an extensive discussion. A structural problem
has developed as bubble economics caused the dollar
to be over valued. Production moved offshore to counter
this disadvantage. A second matter is the importation
of oil at higher prices. For you see, under the Fed's
view of the world the U.S. does not need to drill for
oil as technology and the internet will provide. This
author is still waiting for gasoline to come out of
the internet connection.
The fourth graph brings this concept together with the
price of Gold. Shortly after the ratio passed upward
through about 1.2 the price of Gold bottomed. Around
the world, markets recognized the over valuation of
the U.S. dollar, as indicated by a low price for Gold.
The ratio's long-term rise is an indication that the
U.S. dollar is still over priced, and that Gold is under
priced. As we have been finding in our research, the
only indicator not suggesting that the Gold Super Cycle
is still well on track is the inflation numbers put
out by the government. We all have our opinion on that
matter so no comments are required.
A factor which should give Gold investors further encouragement
is that despite the rise in the dollar price of Gold,
the ratio has not been meaningfully reversed. High oil
prices are certainly part of this condition. Competition
in the future for resources around the world is not
going to be materially reduced in the decade to come.
Does anyone really believe China and India will consume
fewer resources 3 or 5 or 8 or 10 years from now? What
oil prices do in anyone week is nothing more than statistical
Note also that this rising ratio has been dragging Gold
out and upward to the recent fifteen year high. Fundamentals
are driving the Gold price, and will drive it higher.
Remember that this process is really the U.S. dollar
being devalued. Do not let the analysts on Bay and Wall
streets, most of which don't know a fundamental from
a rubber duck, keep you from reducing your exposure
to paper assets and adding to Gold and Silver holdings.
When that financial advisor whips out those color charts
on asset allocation, look for the Gold recommendation.
If no Gold or Silver is included in a meaningful manner,
and we do not mean some pitiful five percent or so,
simply look them in the face and say, "That is
nuts."(Obviously, this author would use another
For whatever the true reason, our intermediate indicators
for Gold, as shown in the last graph, and Silver seem
to be moving toward buy signals. Short term measures
gave buy signals on both last week. An important time
to buy Gold and Silver may be approaching, and hopefully
you are ready to do so. When Gold is trading for more
than US$1,200, will you be sitting on profits or still
reading brokerage reports on technology stocks?
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. His
monumental report, “$1,265 GOLD”, with 255
pages and 98 graphs, is now widely known, and available
at www.amazon.com. Previous editions of this work have
been read by hundreds, probably saving their portfolios
countless millions of losses. 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.