The 5% X 3 box reversal Point & Figure chart below (of the ratio of the gold price to the commodities index)—courtesy stockcharts.com—shows an amazingly consistent pattern since 2005: A strong breakout, followed by a modest consolidation, followed by a strong breakout.
By contrast, the chart below (same scale) of the US Dollar Index divided by the $CRB shows that the dollar fell precipitously from grace relative to commodities between 2001 and 2008 and then made a heroic comeback relative to commodities as investors were hit by a dose of so-called reality.
What was this dose of reality?
Well, let's put it this way: "If the world economy collapses, where can one hide? How does one protect one's wealth?" When fear started to emerge post 2001, the conventional wisdom was that the world was heading for inflation and an associated shortage of commodities as the Chinese and Indian Juggernauts marched to conquer the world economy. The insatiably voracious appetite of the emerging Chinese manufacturing giant would know no bounds. In terms of this logic, obviously, commodities would be the place to be.
The chart below, (of the Shanghai Index) tells this story from an historical perspective.
Note how, post 2005, the $SSEC took off like a rocket and then peaked in the 2007/8 period (just as the dollar was bottoming relative to commodities).
Now the $SSEC is giving off sell signals. So, if the Chinese "miracle" was not a miracle after all then, from an investment perspective, where does one hide? Does one turn to the US Dollar (and US Government debt instruments) or does one turn to gold?
Gold philes have been sounding a tad evangelical in recent years. It does not follow that, therefore, they are wrong. But it does follow that one needs to take a double dose of reality check. Objectively, the jury is still out.
If we look at the same scale P&F chart of the Gold Price divided by the US Dollar Index, then this is what we see:
There is absolutely no question that gold has outperformed the US Dollar since 2001. But the ratio has travelled a long distance away from its rising trend line and may pull back further towards it. So let's take a closer look:
The weekly chart below (also courtesy stockcharts.com) shows a fascinating confluence of indicators
- The 20 week MA is approaching the 45 week MA. If there is a cross over (ie the blue line penetrates below the red line), then the dollar will emerge supreme (for the time being).
- Note how the RSI is in no man's land. Effectively, a point of decision has been reached. Either the ratio will break up (favouring gold) or down (favouring the US Dollar)
- Note how the blue MACD histograms "appear" to be wanting to lengthen below the zero line
Now, if we ratchet up the Point and Figure chart to a 1 % X 3 block reversal pattern, this is what we see:
Oops! We see a short term sell signal which is favouring the US Dollar as a safe haven relative to gold.
Now this does not necessarily imply that the gold price will fall. It might even imply that the gold price will continue to rise—albeit at a slower pace than the US Dollar rises.
The chart below—of the Goldollar Index (courtesy DecisionPoint.com) show that the "product" of these two indicators is now going parabolic. Both might be expected to rise.
If only it were that easy. Unfortunately, when a chart goes parabolic, it is invariably a sign of impending collapse. Something is almost certain to snap if the chart goes perpendicular.
All that we can say with absolute assurance is that we are approaching a confluence of forces where some structural resolution is virtually certain. Unfortunately, from this analyst's perspective, there will be no "comfortable" outcome.
Will gold emerge as the currency of last resort?
Well, such an outcome would certainly "feel" right to most gold-philes. But one should recognize that, that would be an "emotionally comfortable" outcome. It will satisfy the gold-philes' almost religious faith in gold based on the "time immemorial" argument.
Unfortunately, to be brutally objective, the argument that gold is the ultimate "store" of wealth does not stand up to any intellectually based common sense scrutiny. Based on what? The time immemorial argument? There is no logical foundation to that argument. We are looking at a 5,000 year blip in the 14 billion year history of the universe. 5,000 years is only time immemorial from the perspective of thinking humans. In percentage terms, 5,000 years represents 0.0000357% of the time the universe has been in existence.
Well, on reflection, perhaps there is a logical connection. This analyst has pondered the time immemorial argument for decades and has asked himself "why" gold has been valued since time immemorial? What attracted humanity to gold in the first place? Eventually some hints of evidence began to emerge which led to the following hypothesis: Perhaps there was a nexus between gold and the emergence of life. For example, did gold have a role to play in the emergence of DNA?
There is an interesting question that arises from the photographs below: (Source: https://www.lbl.gov/Science-Articles/Archive/LSD-molecular-ruler.html )
These before-and-after images reveal how the gold nanoparticles change after DNA strands are added the nanoparticles. Chen and colleagues use these shifts in plasmon resonance to measure how proteins bind to DNA.
That question is this:
Do the before and after photographs above show the changed nano particles of gold after the introduction of DNA strands? (As is concluded by the researchers) Or, alternatively, did the DNA strands change as a result of the introduction of the gold nano particles? i.e. Does the very introduction of the gold ruler (referred to in the article) have an impact on what the scientists are seeking to measure?
Based on other research which is emerging, my bet is on the latter. Gold has been valued from time immemorial because when we hold it in our hands, we feel good. That feeling of well being is not related to monetary wealth. It has to do with the origins of life.
In Jewish Kabbalistic thinking there are ten levels of existence which replicate as wheels within wheels—just as the model of the humble atom is reminiscent of the model of the solar system. Seven levels of existence are argued by the Kabbalists to be "of this world" and three are "not of this world". Gold is regarded in Kabbalistic thinking as the highest order of relevance of the three levels that are "not of this world". By its very essence, if true, that argument makes a mockery of gold's role in the materialistic world. There is no linkage between gold and materialism in the monetary sense.
Conclusion
For various reasons (only one of which has been referred to above), gold very likely holds one of the keys to humanity's survival. In the short term, the US Dollar seems likely to prevail as the cornerstone of the world's financial system. But the "hard", tire kicking, (non philosophical) evidence appears to be pointing to a coming collapse of that system. Dispassionate (unemotional) logic dictates that Gold is not a cornerstone of the world's "financial" system. But that does not imply that it has no value. By contrast, it is very likely the most valuable commodity imaginable—as we move from the Neanderthal model of human existence to the enlightened model.
Author comment
The old guard is unlikely to give up without a fight. The "obvious" solution to humanity's problems lies in a shift to a new energy paradigm and the "obvious" paradigm to produce so-called base line electricity will be nuclear fission. For that reason I have been researching and writing my second novel, which will take a hard-assed, tire kicking (non philosophical) look at nuclear fission. There is a powerful argument that can be put forward to defend the conclusion that the future of the world economy will be dependent on the speed with which we can embrace nuclear fission energy. Readers can expect society's leaders to become increasingly strident about the need to embrace nuclear fission—which can be made safe by implementation of so-called "breeder" technology and "travelling wave" technology. The chart below (Source: New Scientist Magazine, May 1985) implies that nuclear fission will become commercially relevant in around 2025 (the year that "peak natural gas" is being forecast by the model). Until then, we can expect to hear the virtues of "clean" natural gas being extolled by the banking community.
Will the old guard win?
Well, let's put it this way: "Does whistling in the dark actually prevent the arrival of the bogey man?" In this case, the bogey man is a hybrid monster of debt and derivatives. And, in my view, to embrace gold as the currency of last resort will be analogous to just whistling another tune. What we really need is to flip the light switch. If the reader will forgive the pun, what we really need is enlightenment. But first, we have to experience the pain. We can rely on the old guard to bring us plenty of that in the coming 20 odd years. Of course, there might be another, less painful path.
Copyright © 2010 Brian Bloom
