Printer Friendly

eMail Article

October 08, 2004

Dow - Gold Crossover?
by Alex Wallenwein

In previous essays I noted that, since early 2003, the Dow and the gold price seemed to have been trending together. That has remained true until in April/May of 2004 gold was on a major upswing from its January-March 2004 correction while the Dow began to turn down. (Dow-Gold Synchronicity?).

In "Gold Stocks Threaten Financial Order" I observed that the day the establishment rolled out its big guns and waged its own version of "shock and awe" on the POG (remember the double-whammy of the Rothschild announcement and the Bank of France talking of actually selling some of its gold?) apparently coincided with the chilling realization that a falling Dow and a rising POG cannot be allowed to exist - or else.

Now we are at that kind of a juncture again. Look at what's been happening to the Dow, not of late, but since its March 2004 dead-cat-bounce high near 10,800:

As you can see, the Dow has consistently been bouncing off a steadily lowering ceiling. That ceiling is slightly steeper than the downtrend line that extends all the way back to the Dow's all-time January 2000 high near 11,700.

Looks like some formidable resistance there, if you ask me.

Now, looking at the Gold/Dow relationship between 2002 and now, we can see that gold and the Dow were "enemies" from 1996 all the way to March 2003 when the post Gulf War II Dow-rescue action began. From that day forward, gold and the Dow were pals. That "friendship" appeared to break down in April/May of this year - but the erstwhile bosom-buddies showed a tendency to cross into each other's assigned territories. As our leaders would have it, the Dow's assigned domain is and remains the lofty sky - while gold has been rather earth-bound, or even preferably, would be condemned to the pits of hell.

That was the first time since gold's famous 1980 breakout that such a parting of the ways was about to coincide with an "assigned domain" switch. At a juncture as critical as this one, where an illusion of post-9-11 economic health must be maintained (to prevent a total investor panic), this could not be allowed.

But as we see, it is about to happen again. At the same time, Monsignor Bush's re-election must be assured and, as we all know, election outcomes do tend to take their cues from the state of the economy.

So, what can we learn from the recent past?

We can most certainly expect another attack on gold to prevent this crossover from happening. Rising gold is tolerable to the paper-pushers as long as the Dow is doing likewise, and no sane (speak: properly conditioned) investor would think of switching from paper-assets to real ones right now. But if that situation were to reverse itself, and if gold should go up while stocks are tanking, even the most perfectly "trained" investor minds (I use the term "minds" casually here) may start to take another look and may figure that it's now time to get the heck out of stocks.

That, of course, cannot be tolerated.

But how much ammo do our leaders have left to artificially prop up their losing game? We all know that interest rates are rising again after having been pushed to multi-decade lows since 9-11. Guess how interest rates and gold prices relate to each other? Here is a long-term look at US interest rates since 1975:

Looks suspiciously like a gold price chart since 1975, doesn't it? Here is one for comparison:

So, gold and interest rates tend to rise and fall together, at least in the long term. There is a notable exception in recent medium-term history, though. Gold has been rising since mid-2001, while rates have continuously fallen since very early in that same year.

By comparing the interest rate chart above to the Gold-Fibonacci chart we can also see that in 1976, gold's bottom predated that of interest rates, which occurred only near the end of that same year. Likewise, the federal discount rate peaked far later than the price of gold, namely in mid-1981 (the pink line is hard to see between the others on the rate chart). Gold therefore appears to have a lead-indicator quality when it comes to interest rates. That's not that surprising, since interest rates are the Fed's prime inflation-fighting tool, and gold has always been regarded as a lead-indicator for inflation.

We also know that interest rates are the Fed's prime gold-fighting tool, since high US rates attract capital flows away from gold and back into the dollar, where the powers by far prefer it to flow. But it has been widely noted and discussed here extensively that, this time at least, there is really no way the Fed can jack up US rates to where they need to go to attract investment funds away from gold - if gold should indeed go where it is so strongly pushing right now.

That's why you can expect another "hit".

But is this "hit" going to be successful? My guess is that it's going to be no more successful than the previous one. Yes, gold did fall off its not all that lofty perch back there in April - but only for a little while. Yes, gold investors did get depressed all over again and started selling - but look where we are right now, only six months later. Gold is right back up near the $420 line and, true to form, it has bottomed just about a month and a half before Brother Al started raising rates again in late June. See the chart just below:

Can gold be stopped again this time?

It probably can - but for how long? Rothschild has already done their song and dance. The bank of France has shot its wad. The euro countries have (prematurely) announced their decision to continue the Washington Agreement at a higher limit. And rates are on the way up, which supports the dollar (bad for gold) - but hurts consumer spending and therefore the economy.

On the other hand we know that the dollar must be allowed to go lower this time or the Dow will tank again. Dallas Fed governor McTeer has just stated the dollar needs to go lower to make up for the huge current account deficit we have racked up over the years. He says either the dollar or US incomes must drop to even the imbalance. Guess which option is more politically palatable? There has been talk of a planned 20% devaluation of the dollar even by Bush and consorts in administration circles. Can gold be "hit" very effectively in this situation?

Remember the mantra: the Dow must go up or stay up at all cost! If that is to be achieved by a falling dollar/rising gold price, so be it. What CANNOT be tolerated, however, is for the above-referenced Dow-gold crossover to take place - and to persist for any length of time.

Was gold hit in early April because it was inopportune or dangerous at that time to let the dollar fall further in order to try and support the Dow?

In January 2004, the dollar's fall was halted first by a remark from the ECB's Trichet across the Atlantic, and then by dollar-supportive ruminations from Brother Al on this side of the pond. Gold duly took a nosedive. The Dow had a hick-up, but it caught itself above 10,400. In February, gold and the Dow rose together again. But in March, while gold made a run almost back to its January heights near $430 (horror over horrors), the Dow fell precipitously, while the dollar was flat for the month.

This time it appears to be a very different game. We don't know what the movers and shakers were thinking when they chose to hit gold instead of letting the dollar drop. My best guess is that the euro needed to be calmed down since its rapid climb from September 2003 to January 2004 was putting too much pressure on the struggling EU economies who depend heavily upon exports. Japan was on its last gasp in cranking out Yen to buy dollars in order to protect its own exports. But this time Japan's economy has finally come into its own, and Japan has stopped intervening in the currency markets altogether.

So pronouncements from such high places as McTeer and administration wonks to the effect that a dollar-drop is in the works do tend to show that a dollar-hit is more likely than a gold-hit - at least on the front line.

If that doesn't work, they are very likely to try and hit gold again - but with what? That's a question worth pondering.

I know, I know. They are always scraping up another phony ace from the nether reaches of their inscrutable sleeves, but nevertheless: what will it be this time? Another announcement from central banks that they are trying to sell all of their gold? That one has already done its job back in the late nineties. It's getting kinda old now. It's so - nineties, isn't it?

We are already hearing rumblings from the IMF about IMF gold-stock revaluations. As ignorant as many investors are about gold, any official announcement to that effect will likely cause another POG drop from a cliff near you, but beyond that - what?.

Whatever it may be, what happens this time will reveal how desperate the "powers" really are.

If they let the dollar fall to keep the Dow up without hitting gold, then it tells us that they believe they are still in control. Then, obviously they believe that a growing or at least a stagnant Dow can save the day - for now. If they hit gold hard again, they show their insecurity about their ability to prop up the Dow by a lower dollar alone. Therefore, if they do hit gold, they prove to us how near the day of reckoning really is. Even though gold investors will get all depressed all over again, even though there will be a hard and painful drop in gold prices, the gold price has been getting kind of bouncy lately, hasn't it?

The point is: how much ammo they have left and how effective it will be in the short term is anyone's guess, and is almost impossible to predict - especially in the painful light of the past twenty years. There is one thing that is for certain though: their coming actions will provide a rather revealing insight into their true state of mind, their true measure of confidence in their own ability (or lack thereof) to continue their machinations.

There is another thing that is just as certain: eventually, that Dow-Gold crossover will take place. If they hit gold once more to keep this from happening, it means they are finally at the end of their rope. But that's okay.

Just make sure you are hanging your life's savings from a different kind of rope.

Got gold?

Alex Wallenwein
Editor, Publisher
The Euro vs Dollar Monitor

Just like driving your car, investing only makes sense if you can see where you are going. The Euro vs Dollar Monitor is your golden windshield wiper that removes the media's greasy film of financial misinformation from your investment outlook. Don't drive your investment vehicle without it!

Copyright © 2003-2008 Alex Wallenwein

Image rendition and html coding Copyright © 2000-2008 SafeHaven.com

« BullionVault.com -- Buy gold online - quickly, safely and at low prices »
« Honest Money: A History of U.S. Gold & Silver Currency -- by Douglas V. Gnazzo »

« Opinions expressed at SafeHaven are those of the individual authors and do not necessarily represent the opinion of SafeHaven or its management. Articles are available via RSS/XML. Please visit RSSHelp for instructions. »