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June 25, 2004

Gold & Miscellaneous Rambling
by John Mackenzie

Recently finished reading Tim Wood's "Analysis of Gold 2004" and found it to be an illuminating analysis of the behavior of the Gold Market. Mr. Wood's work has fascinated me since I discovered his furthering of George Lindsay's "Three Peaks and A Domed House" psycho-graph and detailed statistical analysis provided in present day context.

My own analysis had led me to very similar conclusions, in the short term, for Gold. Of late, the emails have begun to flow questioning my position on Gold and Gold Shares given the movements in this important sector.

The following response to Tim's Analysis of Gold 2004 provides a clear explanation of my position:

Tim,

A good read, I enjoyed it very much but wanted to make several comments regarding the piece:

Keynes only referred to the gold standard as a barbarous relic, and not gold. In fact Keynes was fast apace disavowing his earlier works with respect to the bastardization of the "multiplier effect". He had set about proposing a global gold backed currency, but his life was cut short just prior to making these changes in broad public record.

The nine year cycle is a fascinating observation that certainly presents many statistical "knowns'" in black and white. The second seasonal advance, following the 431 ST top, at 433 was well within the range +/-8.5% and assumed to have formed a double top. I had patterned two declines off what I viewed were important tops as well, with projected declines to 353 - 368 range, a 3 & 5 wave affair. Unfortunately, these corrective impulse moves will be violated when gold closes over 404.20 and it looks to be ready to vault over this with little trouble now. As you know, these top must hold to validate the 3 year cycle (CRB) and its relationship within gold's broader cycles.

Perhaps, where I struggle is on the "unexplained" and believe the forces at play here are telling us the very structure of these markets has changed dramatically and forever and what has been perceived to be significant in terms of factual data, may instead be turned upside down by "market forces" that were tempered with these cycles.

In other words, these cycles are "natural" but quite possibly an aberration. how is that possible? I mean the facts are the facts right? Numbers don't lie, just people...

I tend to think in terms of "market forces" as the ultimate arbiter of change. These are driven by many factors at work in a much larger function of the matrices and nuances. there has been a very consistent harmonic in the cycles. These statistical "truths" are now being tested.

Are they being extended or perhaps inverted?

Would suggest that they are and am pleasantly surprised gold's price level has held through a seasonally weak period... the cycle would have indicated, at least on an ST basis due to weak demand and the forward looking nature of the market, that the POG should have seen a decline, and according to your cycle work, a rather important top had formed.

Concur with part one, but not the important top. Why? Simple, I see market forces as being interrupted. What leads me to believe these very forces can and are being interrupted? The degree of command over the price action. It is the ultimate arbiter in my opinion, Supply and Demand... it's just that simple.

People do not understand how much hot money is out there slushing around looking to compound itself regardless of value. I was approached by a gentleman who made $12.1 million in panhandle real estate in the past 30 months on a 2.5 million investment... $12.1 million net. He told me I was a complete "Jackass" for even discussing a housing bubble... he, of course, is completely correct.

I choose to ignore price. The structural changes had been made and the perfect environment for rampant price speculation had been laid. The foundation was so strong, it most likely still has legs even after this most recent run in housing, we may again see another very large rise. Not in real terms, but in price, none the less.

Would like to put a very simple thesis by you and see if it does not help explain why I believe the very structure of the market has changed and why these cycles are going to become less meaningful until a new pattern has established itself.

Gold has been fixed in price for a very long time, it was not until 1974 it was allowed to float in a purely fiat regime. Do not want to bore you with fundamentals, but there is a VERY important sea change that has finally taken place in the structure of the gold market. gold is returning to a monetary status.

Previous cycles were managed with supply and demand and NOT price. We had Central Banks selling Gold, Producers hedging Gold and Bullion Banks and the Federal Reserve/U.S. Treasury selling paper gold (SDR's for forex settlement).

The actual market for gold is really two tiered:

The dominate tier has overwhelmed the secondary tier for 22 years. It is only in the past three years the real and true primary tier for gold has begin to exert itself.

Why?

Quite simply, we have never had a fiat currency regime whereby the moneyess of money is now in question. Very few truly understands what money is today. They will tell you it is a Dollar, but a dollar is nothing, a bad hangover from the early days of the gold standard. A dollar is undefined today. Federal Reserve Notes are not Dollars but serve as the medium of exchange. This is very odd psychology for global markets operating under a "Dollar Standard".

The next cycle may very well find gold well above $500. This lines up well with your monthly chart suggesting it would be the preferred move should the cycles align. I happen to believe we are headed there and most likely higher still.

$640 to $720 has been my true range for gold into 2005.

There has been a paradigm shift that has quietly snuck up on the markets structure. I do believe it will have a very broad impact upon historical norms and the cycles you have put forth.

I would go so far as to suggest these cycles are about to invert and exceed "norms" and admit there is very little to base this upon but price and observation of actions within the market, but do consider all possibilities as wide open and this is by far the most important observation I could impart upon your work.

If we are to approach the markets without bias, we must listen and observe all their subtleties. we may be basing our cycle guidelines on a market structure that no longer exists. I cannot prove or disprove this theory at this time, but it certainly will prove me correct or incorrect in short order.

I remain open to all possibilities, but do believe, barring a complete collapse, the structure of this market has been radically altered in near silence.

We shall see the physical market overwhelm it's paper shackles and give us an entirely new set of possibilities. Clearly the same applies to the crb and crude oil. supply, demand, and price... the simplest functions of an efficient market free to operate under the elasticities of supply/demand in their purest form... price.

Kind Regards,

John

John Mackenzie

John Mackenzie manages private capital - Email: m2jrmfl@bellsouth.net

Copyright © 2004-2005 John Mackenzie

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