Today’s market certainly proves that the speculators in gold lack a fundamental understanding of the metal and therefore will suffer whipsaws more often that profitable trades.
The flavor of the month sees gold's intraday moves stimulated by every economic report issued. If it shows a positive bend then the specs think of higher interest rates and attack gold interpreting higher rates as being dollar positive. If the report is negative then they buy gold on the contrary analysis.
This explains why the price of both gold and the dollar in US time gaps all over the place while the 24 hour market in gold and dollar markets rarely gap.
There is no question that the world’s economic recovery has lost its upward momentum and that will not be recaptured because of the price of oil. Oil is not getting cheap soon if ever again and if Al Qaeda strikes oil transportation facilities outside of Iraq oil will breach $46 and run for $69. This makes oil a good "call" buy on bouts of selling that occur when a volatile commodity is buffeted around like this.
The market seems to take every utterance of Chairman Greenspan as gospel. However, the last pronouncement was made with only one goal in sight and that was to save the US dollar from a fall into oblivion that was portended by the market’s action.
Interest rates are NOT headed significantly higher because the Fed is a political body. The economy is NOT overheating but rather slowing down in terms of momentum. No one expects the economy to crater when so much stimulation is being applied. Nonetheless, a horizontal move of economic indices at these levels is not out of the question. All that is dollar negative. What is dollar negative is gold positive and this is beyond any doubt a generational bull market in gold.
No one has given due consideration to what they are speaking about concerning interest rates and inflation. There is much talk today of the Fed moving the shortest term interest rate up to 3.5% over two years to effect equilibrium. Inflation might well be at 4% by the end of 2005. If inflation is at 4% and you can earn 4% on six month money, true interest rates are at zero.
Since there is no way that the Fed intends any such thing as 3.5%, you can be assured that the effective cost of money at 4% inflation will be well below zero and that spells doom for the US dollar. Bond market and financial analysts know this but have you heard any such utterance on financial TV?
Pravda massaged all the news under Stalin and I am hard pressed to see the difference between US media today and Pravda at that time. This does not assure calm markets but rather insures that when markets break up and down it will be a sight to behold. All this manipulation of news will accomplish is the construction of the biggest spring that has ever existed in the marketplace and when it lets go it will cause enormous casualties.
That is where we are in today's markets both in equities, gold and the US dollar. The Fed and the Treasury are trying desperately to massage perceptions to regain the markets of 1998, but this is going to backfire with a vengeance that has never been seen before. BS simply will not float forever and the mass realization that everyone has been had will create an implosion without precedent. It does not matter who is in office.
Even if there was a change of leadership, the ship is damaged and the repair is costly beyond your wildest dream. The US is a debtor nation and like all those that slip into that condition the future is not what the spin doctors would have you believe.
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