could be overbought, but my contrary indicator never changes...
An Interview Worth Its Weight In Gold
8/31/2006 12:44:08 PM
The timing was excellent -- Anne Evers, the editor of The Gold Report wanted to interview Bob Prechter, and Bob was in the midst of publishing his new book about how he has used the Wave Principle to forecast gold and silver over the years. The Gold Report published the interview last week on its web site (theaureport.com), and Anne graciously gave us permission to publish some excerpts from it. To find out more about How to Forecast Gold and Silver Using the Wave Principle, please click here.
The Gold Report: Historically, gold has risen as the dollar has declined, but the correlation has not been as strong recently. Where do you believe the US dollar is headed, and how do you think it will affect gold and silver?
Bob Prechter: On the contrary, I think gold and the Dollar Index have been acting pretty well in concert. The correlation is not exact, but market correlations rarely are. Gold tested its low in 2001, and the dollar topped in 2001, five months later. The dollar bottomed in December 2004, rallied and then tested its low in May 2006, the same month that gold topped. Under the Wave Principle, psychology is typically very bearish at the low of “wave 2,” which is essentially a test of the previous low. The sentiment towards the dollar in 2006 was nearly as bearish as it was in 2004 at the low, and the final surge in the gold rally was an expression of that sentiment. I think if you study the historical record, you will see that gold and the Dollar Index are generally in no stronger sync than they have been recently. All that aside, though, there is no reason why the two markets have to trend together. If the euro and other currencies were to inflate faster than the dollar, and if the psychology of the markets were such as to reflect the difference, then the Dollar Index could quite easily go up while gold was going up.
The Gold Report: More than three years ago (in February 2003), in an interview with Financial Sense Online, you said: "We are more in debt now than in any time in the history of the country. That is setting the stage for the problems we face." Since then, both the government and consumers have continued to dig themselves deeper and deeper into debt. Do you still believe, as you did then, that the markets and the economy are headed for a crash? And what impact will that have on the gold market?
Bob Prechter: I believe more than ever that a crash is how the debt bubble will deflate. If you plot the DJIA in terms of gold, you will see that the stock market has been crashing relentlessly since 2000 and recently hit a level equivalent to Dow 4000. In other words, if we had begun pricing the Dow in terms of gold in January 2000, it would have fallen by 2/3. It wouldn’t be sitting near its high. So the only place I’m wrong about a crash is in the nominal figures. But I think that is coming, too. If I am correct that the crash will be deflationary, it won’t make gold go up. People will be scrambling for dollars to pay interest and principal on those debts you mentioned.
The Gold Report: Exchange Traded Funds are relatively new – in fact the first silver ETF was only just recently launched. How do you think these affect the gold and silver markets? Do you believe these are good investment vehicles for precious metals?
Bob Prechter: The new ETFs will have no impact on the level of pricing. But their creation does say something about market psychology. Usually—although not always—financiers create trading vehicles when a market has been hot. The only advantage I see to trading gold ETFs instead of gold futures is when a trader doesn’t trust himself to stay off leverage. Otherwise, it’s just another scorecard for the Great Asset Mania.
The Gold Report: Do you recommend that investors buy bullion or stocks in precious metals companies? Or both?
Bob Prechter: Right now I think gold is in a bear market, so I’m not recommending either. But generally speaking, the best time to buy gold shares is when you are bullish on the stock market along with gold. Aside from the 1970s, there is a more persistent correlation between gold stocks and the DJIA than there is between gold stocks and gold bullion. The time to own bullion over stocks is when you are bullish on gold and bearish on the stock market.
The Gold Report: How much gold and silver should investors have in their portfolios right now?
Bob Prechter: I always want to have a ready mechanism to buy gold if I think it’s going to enter or extend a bull market and also to own some gold as a hedge against draconian measures by the money monopolists. In extreme monetary times, when one needs a real asset that is not an IOU and is not easily manipulated, gold is the top choice.
The Gold Report: What else can you tell me that I won’t hear elsewhere?
Bob Prechter: I think it’s vitally important that gold, silver and the DJIA peaked within the same 24-hour period in May. The Dow topped on May 10, the metals on May 11. I have been making the case that liquidity has been driving all the hot markets together, and that includes real estate, copper, oil, foreign currencies and junk bonds. I further contend that when deflation hits, these markets are likely to go down together. So there will be no “hedge” investment, no markets in which to get rich while other suffer as there were in the 1970s. The only refuge will be safe cash equivalents, and they are few and far between. If you want to get safe from the crash, I spelled out how to do so in Conquer the Crash. Look around. Real estate is slumping fast. Gold and silver are down from their highs. The S&P is still 15 percent below its 2000 high, and its rally from 2002 looks tired. The hype on oil is relentless and deafening, but its net gain for the past year is zero. Despite massive credit inflation, grain prices have been falling. I think these are warning signs of the crash I’ve been talking about. Gold bugs say that the Fed can inflate the economy out of any difficulty. I guess we’ll soon find out.
Editor's note: Remember, you can find out more about how to order How to Forecast Gold and Silver Using the Wave Principle.
