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Gold By Colin Twiggs
March 17, 2009 2:30 a.m. ET (5:30 p.m. AET)
Spot gold is headed for another test of the band of support between $890 and $900. Failure of support would break the rising trendline and warn of a down-swing to test $700. Breakout above $950 would indicate another test of $1000.
Gold has behaved out of character over the past few months, diverging from its usual relationships. Performance against the dollar is normally inverted: when the dollar strengthens, gold falls — and vice versa. Gold made a typical response from 2006 to mid-2008: making a strong bull trend when the dollar weakened. In late 2008, however, the dollar reversed and started to strengthen. Gold initially weakened, as expected, but then rallied, testing its previous highs — even while the dollar continued to rise.
When it comes to precious metals, silver and platinum normally follow gold closely. But now the two have diverged from gold, with both in a strong down-trend.
After finding support at $9 silver rallied to $15, but is likely to re-test support before there is any suggestion of a trend change.
More susceptible to the economic cycle, because of stronger industrial demand, platinum underwent a dramatic fall in 2008. The primary trend is definitely at odds with gold.
What All This MeansGold is rising despite a strong dollar because the investing public are looking for safety — buying both the dollar and gold in their need for security. Crude oil, silver and platinum, however, warn us that something may be amiss. With the collapse of the global debt bubble, we face an extended period of deflation. And while gold is a great inflation hedge, it is a pretty lousy investment during a deflation.
There is an alternative scenario, however, which is driving the current divergence. If the (US) federal government pulls the inflation lever, gold prices will soar. Inflation is a tempting solution, especially with massive federal debt, enormous contingent liabilities, collapsing housing prices, and a banking sector on life support. The easy way out may be hard to resist. With liabilities denominated in your own currency, it is a simple matter to give your creditors a "haircut". Double the money supply and your debts are halved in real terms, house prices miraculously recover and bank collateral will rise from the dead. There is just one catch, however. Hyper-inflation. And inevitable collapse of the already-creaking fiat monetary system.
But that would not be bad news for everyone. If the Fed added a few zeros to their dollar bills, gold bugs would be cheering from the sidelines.
In short, gold is likely to decline as long as we experience deflation, but would quickly reverse in the event that the US starts to "print" money (ie. monetize its debt). That would most likely be flagged by a falling dollar.
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