Gold’s Rise And The Dow’s Fate by Hubert Moolman

24 June 2010

In a previous article called “Gold, Dow And The South African Rand” (dated 24 May 2010), I stated: “we will probably have more of these scary drops in the gold price as we continue into this volatile phase of the gold bull market. The good news for gold bugs is that we will also have some huge up days, and the general trend will be very much up.”  If you look at the gold chart, you will notice that despite the volatility in the gold price since then, the trend is definitely up. When these scary drops happen, many people start panicking and eventually get “shaken off” this great bull market.

It is important to keep the big picture in mind. When one only focuses on the day to day movements of the gold price, one will be one of those who will lose out. At this point, where gold is going parabolic, you could sell all, and a week later the gold price could be $150 higher (or even more). At this stage of the gold bull, a sharp drop in price is an ideal opportunity to add to long-term positions; it is not a time to panic and sell one’s core holdings. Believe me, while gold is going higher in this bull market, there will be many sharp (daily or weekly) drops.

What is the big picture for gold?

The chart above is a long-term gold chart (thanks to goldprice.org). This chart is the big picture for gold, as far as I am concerned. If you look at the chart, like I do, then it should tell you that the gold price is going to explode upwards very soon. It should also tell you why looking at the big picture is so important, and why focussing on gold’s day to day movement might cost you a fortune. For more information about this gold chart and its analysis, you can purchase my Long Term Gold Fractal Analysis Report (email me for details).

What is the short-term gold picture?

I have marked the two patterns that I feel are similar. I have marked the patterns by highlighting 5 points on each. If the second pattern resolves in a similar manner to the first, then the gold price should hit point 5 on the upper resistance (trend) line indicated on the chart. For these fractals (patterns) to really be similar, there should be a measurable relationship between the two patterns, measurable in terms of time as well as price movement. So, for the second pattern to resolve like the first and still be a valid fractal of the first, it has a certain amount of time to do it, and a certain price movement to cover.

I can tell you that time has been moving, whereas price has not been moving as fast as should be expected (based on the time movement). What does this mean? If these two patterns are actually fractals, then price has to catch up with time, and that should mean strong rallies (shorter time periods) could be coming up. As I am writing this, gold is up $20 the last couple of hours. It is going to be interesting.

Is the big picture in gold, as shown above, consistent with what is going on in the world economy today and with what is expected going forward? Consider the following:

• Debt levels world-wide are at historically high levels
• These debts are holding back the world’s economy, and will continue to do so for a significant number of years. (see here for more on this)
• These debt levels are probably going to bring down the current world monetary system.
• All fiat currencies are depreciating, as measured against gold, and this will increase as more countries struggle to meet their debt obligations
• Tangible assets like gold and silver are under-valued as compared to intangible assets like equities and bonds. This is illustrated by the Dow/gold ratio. (see here for more on this)

When one takes into account the points above, then it is hard not to agree that the big picture in gold, illustrated above, is probably accurate.

If the world’s debt levels are at all-time high levels and are likely to hold back the world’s economy, then this should affect the economics of listed companies and the real values of companies listed on the great stock exchanges of the world.

This does not bode well for Dow and other listed stocks. They will very likely lose real value (as measured in terms of gold, silver and other commodities) over the next couple of years and beyond.

Nominal value (the value as listed on the exchanges in terms of fiat currency), is an altogether different matter. This matter is often referred to under the inflation vs. deflation debate. It makes things easier when one distinguishes between nominal and real values, when trying to understand this inflation/deflation debate, or where the stock markets are going over the next couple of years. One could still have higher nominal values for general stocks, notwithstanding bad economic conditions. Will we have higher or lower nominal values for general stocks over the next couple of years and beyond?

For more on this and gold commentary, you can subscribe to my free newsletter at http://hgmandassociates.com.

There are also some great signals that I like to use when forecasting where the stock market is likely to go in the future. One such signal or proxy is the value of the South African rand compared to other currencies. The South African rand has been a fairly reliable measure or proxy for risk aversion. When the general markets take a hit and everyone is running for safety, the Rand usually gets hit hard.

Below are two South African rand charts that I have been tracking. I have done some proprietary fractal analysis, which I would like to share with you.

The first is a 5 year US dollar/SA rand chart (generated on fxstreet.com). In a previous article, I have used this chart and more to show why I think the Dow has topped for now. On this chart, I have indicated two black lines as a possible trading range. I have also indicated two possible fractals. I have marked 4 points on each fractal pattern to indicate how they are similar. If the second pattern resolves like the first pattern, then price should break out of that top line of the trading range and make its way towards the 9 price level. This will likely mean that the Dow will visit the 9000 level. This appears to be consistent with fractal analysis I have done on the Dow.

The second is a 5 year Canadian dollar/SA rand (generated on fxstreet.com). Again, I have applied my proprietary fractal analysis to his chart. I really like this chart, since it clearly illustrates (in textbook fashion) how effective fractal analysis can be. This chart gives a clear signal when fractal analysis is applied. It is probably due to the fact that both South Africa and Canada are resource based economies (just a guess).

Again, I have indicated two possible fractals. I have marked 6 points on each fractal to indicate how they are similar. If the second pattern resolves like the first pattern, then price should break out of that top black line, and make its way towards the 8.5 price level. This will likely mean that the Dow will break down. The similarity of the sections indicated by the circles gives me added confidence that the second pattern will resolve like the first.

My other recent articles you will find at  http://blogs.24.com/hubertmooolman , since I only recently started posting here.

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If you find this information useful, please forward it to friends or family so that I can continue to reach people that would not normally read informative sites such as this one. You can subscribe to my newsletter at http://hgmandassociates.com/. My newsletter is free and I send it out whenever I feel I have relevant information to share. I do gratefully accept donations, though, so that I can continue to research and write. Send me an email for details. 

May God bless you.

Hubert Moolman

You can email any comments to hubert@hgmandassociates.co.za

GOLD, POLITICS and INFLATION – Hubert Moolman

26 November

 Highlights

Real inflation in South Africa is an average of 68% per annum over the last 3 years

We have been having hyperinflation for a while now

 

What does gold have to do with inflation and politics? The answer is simple: EVERYTHING. The following quote from a 1966 article sums it up best:

“In the absence of the gold standard, there is no way to protect savings from confiscation through inflation. (emphasis added) There is no safe store of value. Under a gold standard, the amount of credit that an economy can support is determined by the economy’s tangible assets, since every credit instrument is ultimately a claim on some tangible asset. But government bonds are not backed by tangible wealth, only by the government’s promise to pay out of future tax revenues, and cannot easily be absorbed by the financial markets. A large volume of new government bonds can be sold to the public only at progressively higher interest rates. Thus, government deficit spending under a gold standard is severely limited. The abandonment of the gold standard made it possible for the welfare statists to use the banking system as a means to an unlimited expansion of credit” – Alan Greenspan

(You can find the article here http://www.gold-eagle.com/greenspan041998.html)

What Mr Greenspan was in fact saying is that there is for us (the whole world) today no way of protecting our savings/wealth from government confiscation. This is so because the whole world is off the gold standard. That was when the USA abandoned the gold standard in 1971.

What is inflation in reality? It is the loss of buying power of the money we use. Where does the lost buying power go? Let me explain in simple terms. In fact let Mr Greenspan instead explain. After all, he not only wrote about this in 1966 but also executed it to perfection during his time as Chairman of the US Federal Reserve.

“Thus the earnings saved by the productive members of the society lose value in terms of goods. When the economy’s books are finally balanced, one finds that this loss in value represents the goods purchased by the government for welfare or other purposes with the money proceeds of the government bonds financed by bank credit expansion.”

  

Is the official reported inflation figure or loss of buying power accurate? Let us see:

The official cumulative inflation rate in SA from 1 Oct 2005 to 1 Oct 2008 was 24.82%. Now instead of testing the accuracy of this figure by re-calculating it using the official calculation, I will instead use Mr Greenpan’s simple but accurate “definition”.

Mr Greenspan says that with the absence of the gold standard there is no way to protect savings from inflation. So, I deduce that he is saying that the inflation (rate) is the difference between what goods would cost if we were on the gold standard as supposed to using fiat money(not backed by gold) as we use today.

Mr Greenspan’s “definition” for real inflation makes checking the official figure, for accuracy and honesty, very easy.

I will simply calculate the difference in buying power from 2005 to 2008 between using gold as money as suppose to using rands as money. That difference would then represent loss of buying power as explained by Mr Greenspan.

So at the official inflation rate of 24.82%, a certain amount of goods would cost 24.82% more in 2008 than it cost in 2005, if we use rands as money. If we look at what the same goods would have cost in 2005 in gold ounces and compare it to what it would cost in gold ounces in 2008, we would do the following.

Price of gold on 1 Oct 2005 was R 2 986

Price of gold on 29 Sept 2008 was R 7260

(Please note that I used the closing price of GLD as listed on the JSE))

In 2005 the goods cost 3.35%(100/2986) of an ounce of gold.

In 2008 the goods cost 1.38%(100/7260) of an ounce of gold.

The price of the goods is deflated by 58.81%(deflation) in gold terms.

So in fact, if we were using gold as money, the price of the goods would have been significantly lower. So we actually have deflation when we use gold as money.

So to get to Mr Greenspan’s “definition” of inflation we simply do the following:

We equal the goods to 100% and say that the goods in 2008 using rands cost 124.82% (100+24.82%rand inflation) and using gold ounces it cost 41.19% (100% less 58.81% deflation)

That gives us a real cum. inflation rate of 203% for the 3 years((124.82/41.19)-1). That is about an average of 68% per annum. This 203% in fact is the premium (penalty) for using fiat money as suppose to using gold as money. This premium in fact goes to the issuers of the fiat money (government) as Mr Greenspan explained.

203% inflation, I am afraid is not inflation but hyperinflation. What makes this even more shocking is the fact that if you were to do this calculation in most other countries you would also come to the conclusion that they are experiencing hyperinflation.

You might ask how this is possible. Well, inflation can be hidden in many ways, which goes together with using a flawed measure. Let’s look at a few possibilities.

This is not exhaustive,you can add your own.

1. Keep the price the same but give less quantity. For example softdrinks were mostly sold in 340ml cans or even more around the world. When the metal used to make the cans got expensive (and possibly the contents) they made it in 330ml which is now basically a world standard. Look at houses for example, the price is way higher but you get much less square metres. Maybe you have observed other examples?

2. Keep the price the same but change the quality. Veneer wood instead of solid wood, gold or silver plated metals or other cheaper metals instead of using solid quality metals.

3. Improvements due to technological advances and other should bring prices down. Instead prices keep rising.

4. Cheating when measuring the Consumer Price Index etc.

5. Shifting production –over the years world production has been shifted to countries such as China where people are willing to accept much lower wages.

So, if inflation is so much higher than is generally reported, how do we protect ourselves? The answer is simple. I simply consult Mr Greenspan again for the answer, and that is, use the gold standard. One can use one’s own gold standard by simply investing in gold (and silver).

If you find this information useful, please forward it to friends or family. If you would like to subscribe to my news letter please send me an email. My news letter is free and I send it out whenever I have something to “say”.  I do accept donations though; email me for how.

You can find my latest articles at http://blogs.fin24.com/hubertmooolman

May God bless you.

Hubert Moolman CA(SA)

PS. Next time I will share my thoughts on the so called great inflation/deflation debate

You can email any comments to hubert@hgmandassociates.co.za