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Gold prices
are hitting new highs in a big anniversary week -- 40 years ago on Monday,
Nixon shut the gold window. There is still room for profit in this trend.
This was a historic week on
multiple levels.
Amidst a backdrop of market
carnage, gold prices touched new all-time highs.
(In nominal terms, that is. Adjusted for inflation, all-time highs for gold
are above $2,000 per ounce. We'll get there soon enough.)
At the same time, yields on the
10-year U.S. Treasury note fell below 2% for the first time in 70 years.
Benchmark borrowing costs in Germany and the U.K. also fell to multi-decade
or new record lows, according to the Financial Times.
Volatility approached historic
highs too. Violent sell-offs in equity markets took a pattern of starting off
in Europe.
On Thursday, for example, the
German DAX plunged 4% due to an unknown source of heavy selling. U.S. markets
then followed in their later opening, a terrible manufacturing survey adding
to the gloom. (Some used the word "catastrophic.")
Investors are losing hope in the
recovery and losing faith in the powers that be. The threat of recession and
deflation in turn begets the destruction of paper currencies. As an
alternative they are turning to gold.
This is a fitting week for gold
to go vertical because of one other notable bit of history. It was 40 years
ago this past Monday -- Aug. 15, 1971 -- that President Richard Nixon shut
the gold window, essentially declaring to the world that "we are all
Keynesians now."
As Edmund Conway wrote in the
U.K. Telegraph:
It was one of those seminal
moments whose significance has only gradually become apparent, obscured as it
was at the time by Vietnam and then Watergate. But the more one examines
economic history, the more obvious it is that this was one of the most
important policy decisions in modern history.
Were it not for that decision,
it is quite feasible that we would not have suffered the financial crisis of
the past four years; or indeed the crisis after crisis that
have beset the world's markets. We might not have just faced the most
volatile few weeks in markets since 2008.
"All Keynesians now" indeed.
Gold Prices
There has been a lot of talk
recently that gold is overbought. That may be true, and it's one reason Macro Trader
recently took partial profits on our long gold and gold stock positions.
It's also helpful to remember,
though, that oscillators -- measures of overbought and oversold conditions --
can be worse than useless in times of mania and crisis. With strong and
persistent pressures, that which looks "overbought" just keeps
getting more and more overbought. That which looks "oversold" just
keeps getting more and more oversold.
On Aug. 8, gold prices gapped
higher after a strong trend move on heavy volume (as shown in the GLD chart
above).
At first, technicians were
inclined to call the move an "exhaustion gap," suggesting the trend
was close to done. But now it is being reconsidered as a "measuring
gap" -- which would suggest we are only halfway through.
At some point gold prices will
correct (though perhaps not as swiftly and deeply as those on the sidelines would like). The question, though, is what is the long-term trend, and how to take advantage of it?
Stretching out the time horizon
a little, the next $100 move in gold is not as important as the next $1,000
move. All things being equal, gold $3,000 is likely. (The multinational bank
Standard Chartered has made a strong argument for gold $5,000, which makes
$3K look conservative.)
So how to exploit a potential
rise like that? Is it too late? It may feel that way at times. But in truth,
the game is still in early innings.
We haven't seen true
"mania" yet. We haven't seen institutional asset allocators put 5%
of their portfolio holdings in gold yet. And in terms of macro drivers, it is
still fresh news that the Federal Reserve will be leaving interest rates at
zero -- the big ZIRP -- for years.
There will be big ups and downs,
no doubt. And for those less inclined to trade, there will be opportunity in
gold stocks. Particularly low-cost junior resource plays.
In some ways it's surprising.
The gold miners, and particularly the juniors, have not been heavily caught
up in the golden bull run yet.
Perhaps this is because gold's rise still feels odd -- somehow
temporary, another flash in the pan. When Mr.
Market wraps his head around a permanently higher gold price,
however, that could be the game changer.
Justice
Litle
Taipan
Publishing Group
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