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Gold - What Happened?

By Howard Katz      Printer Friendly Version
Mar 24 2008 11:32PM

"Therefore, the dollar can rally. And that means that we can have a sell-off in gold and other commodities….Sell all [gold] shares."

"From now on stocks will rise….My favorite group…is the housing group….Buy at noon on Monday." - from The One-handed Economist, March 7, 2008, p. 8.

This advice served us well at The One-handed Economist. We were able to avoid $20,802 in diminished profits on our gold stocks and add on $50,650 in good, solid profits in the housing stocks. That’s right, I know about the sub-prime crisis, and I am buying housing stocks. But first let us review the recent top in gold.

The good chartist is the careful chartist, the one who looks twice before leaping to a conclusion. This careful chartist has read Technical Analysis of Stock Trends by Edwards and Magee, and he spotted the breakout of a giant triangle (most easily visible on the monthly basis chart) in September 2007.

Note: This chart is an approximation because it was drawn on an arithmetic chart. The correct price objective line is drawn on a semi-log chart. Sometimes the two types of chart are very close, but sometime there is a significant difference.

Note also that gold had a 75% advance in late 2005 and early 2006 prior to entering the triangle. In this regard, a triangle acts like a pennant. It divides a larger move in two parts. We can therefore expect a 75% advance from the beginning of this current move (mid-August, 2007 at $660). This would give a second price objective at $1150.

Subject to confirmation by other indicators this predicts a resumption of gold’s advance (after the end of this decline) and a subsequent move to $1150.

A second clue to the advance was given by the chart of the U.S. dollar.

As the dollar broke to new lows toward the end of February, this defined a down channel given by the downtrend line and a parallel line drawn through the Thanksgiving low. (Again to be completely accurate this should be done on a semi-log chart.) This suggested that the dollar decline would have a short term bottom around 72. And therefore, this would define a commodity top.

A third clue came from the precious metals. From mid-February to early March, silver outperformed gold. Silver usually lags gold for much of the move and then comes on like gangbusters in its final stages. Thus, if you can get the order of magnitude of the move right, a bullish performance by silver has bearish implications for the precious metals in general. In early March, the perennial silver bulls were screaming about a short squeeze in silver. As it turned out, the silver shorts squeezed right back and came out with some nice profits.

Another clue from the precious metals was in the fact that volume rose to the March 17 peak, both in gold and in the gold stocks. There was bullish news on gold on the morning of the 17th, but it could not hold the gains, and the day wound up looking like a one-day reversal.

This call has been vindicated over the past week as gold came down 12%, crude oil 11% and the CRB index 13%. Since this was a spike top, it is likely that most of the decline has already occurred, and this is confirmed by the fact that the dollar will meet serious resistance at 75 (the Thanksgiving bottom) and is not likely to go above this level.

Another point to note is that the Bernanke easing is even worse in fact than it seems. The Fed targets the Fed funds rate to get the public to watch it (like a magician’s slight of hand), but it is interested in affecting the T-bill rate as this is the key short term rate which affects all other short rates in our society. The Fed has brought Fed funds down to 2.25%. But on March 20, 2008, the T-bill rate got down to 0.63. I know it is astounding; so I will say it again. The key short term rate in our society is now 5/8 of a percent and this at a time when prices are rising by an official rate of 4.3%.

Let us do a little math. 0.63% minus 4.30% equals -3.67%. The real rate of interest on T-bills today is -3.67%. When real interest rates go negative, the demand for loans becomes infinite because they pay you to borrow. Crazy things happen. The last time real interest rates in our society went negative was in 2003, and we had the housing bubble. The time before that was in late 1998, and we had the dot com bubble.

What crazy bubble we will have this time is hard to say at this point, but housing is a group that always moves well when interest rates are coming down, and over the past few months it has started to show good strength.

The stock bear move of October to January was not a real bear market. It was mostly a lot of hype in the media designed to cover Bernanke’s tracks and justify his easing. At the January 22 and March 10 bottoms, the sentiment indicators on stocks were very pessimistic. These are the two most important factors (sentiment and Fed policy) one can have in stocks, and they are both very bullish. This is why I decided to recommend the housing stocks, and over the past fortnight my selections are up 24%.

When will commodities turn back up? How long can the Fed successfully bull the stock market? Will Ben Bernanke completely destroy the United States of America? These are the questions I will be watching in the future. You are invited to visit my web site,, where I discuss social issues and economic theory (no charge) and to subscribe to The One-handed Economist, where I help your portfolio to grow ($300 per year).

Are you making money today?



Howard S. Katz was one of the early gold bugs of the late ‘60s and ‘70s, turning bullish on gold in 1965.  His favorite gold stock, Lake Shore Mines, went from $3/share to $39/share over the course of the seventies (sold at $31).  Katz turned increasingly skeptical about gold as it mounted its final rise in 1979, and he called the top after the close on Jan. 21, 1980 (with gold at $825.50/oz.).  Katz traded gold in and out during the ‘80s and ‘90s and once again turned long term bullish in Dec. 2002.  His thoughts on commodities, stocks, bonds and real estate are available in a letter entitled The One-handed Economist and published every two weeks giving specific advice on trades in stocks and futures.  This letter is available (both electronic and paper copy) for $300/year with a 3-month trial for $100.  Send to: The One-handed Economist, 614 Nashua St. #122, Milford, N.H. 03055.  (Include both electronic and mailing address.)  Mr. Katz’s blog is available weekly (no charge) at