Gold bounced this week as traders covered shorts and pushed gold 8% over its April 15, 2013 low. That’s the story this week.
Aided by rumor, pomp and circumstance, traders create volatility by placing huge bets on future movements of securities. Recently at record highs, short activity for gold has been well publicized. (Shorting is the investment process in reverse, it’s selling high and then buying low – in that order.) The Wall Street establishment not only coordinates this activity (massive gold shorts) but actually advertises it on CNBC, their favorite propaganda network. They do so to fuel the fervor of speculative trading – to create wild swings in price.
Traders thrive on volatility.
It was just a few weeks ago that rumors surfaced about the Federal Reserve ceasing QE activity. That policy move, it was speculated, would strengthen the U.S. dollar and hurt the advance of gold. As such, gold dropped dramatically.
I threw cold water on the idea at the time, posing the question: Why would the Fed change course now with high unemployment and low inflation? It just doesn’t make any sense and not consistent with this Federal Reserve.
In fact, investment markets, including gold, remain extremely manipulated. Along with gold, stock market strength jumped 4% this week while the Dow Average advanced just 1%. See the chart below.
The pertinent question for investors right now is: Where is the Dow in its cycle?—Is it mirroring the 15-51 Indicator’s September 20 trend or is it at the September 5th point?
I’m not exactly sure of the answer. While uncertainty is not uncommon in times like these, long-term investors who only need to buy low and sell high need not be overly concerned about identifying tops and bottoms (highest and lowest points of valuation). That is not required for successful investment. To put it another way, market timing is not required for making large sums of money in the stock market. Understanding cycles of valuation, however, make your investment decisions more timely and much more profitable.
Patience comes naturally with a long-term investment view. Today, tomorrow, and next week mean very little in the scope of a five or ten year plan. All the advice in these blogs is directed from a long-term perspective. From this angle, the Dow is high indeed, but it may not be at its highest point before correction commences. The 15-51 Indicator is 24% off its September 20th all-time high, but it may not be at its lowest point because an unavoidable "market" sell-off would produce a lower valuation.
Gold is volatile, and will get more so if for no other reason than it is extremely difficult to answer the question: What is the fair value of gold? Like all raw commodities, there is no operating unit for gold, no gross margins, no balance sheet, and no P/E multiples. Its value is determined strictly by the laws of Supply and Demand.
As mentioned, gold is a money hedge; and when the value of money depreciates the value of gold rises, and vice versa. The perception of need drives gold.
The 2008 market crash is a great example of this. As we know, it resulted from the "financial crisis" which brought about massive and broad-based currency debasing. Remember, the entire U.S. banking system ran out of cash back then – and so did the Federal Reserve. As a result, the Fed ramped up the printing presses and produced an unprecedented amount of new currency which it infused into the banking system through programs like TARP and QE. This dramatically diminished the perception of monetary worth – and gold exploded. See the chart below.
Gold bottomed-out several months before stocks did in late ’08 and recovered faster and much more potently than stocks in ’09. Gold’s dominance has continued because the environment for money has been persistently bad, with trillions of newly printed dollars entering the market every year since the crash.
Corrections happen all the time, and when markets are manipulated (like record gold short positions and subsequent coverings) they seem to happen out of the blue and for little logical reason. That’s the nature of the beast.
Caution to those who let gold’s recent reset prompt them to place additional capital into stocks. That would be succumbing to said beast.