The following is an excerpt from commentary that originally appeared at Treasure Chests for the benefit of subscribers on Thursday, August 14th, 2008.
Gold is a political metal, where to this day its primary movements are still governed more by politics than any other factor taken in the proper light. You see it's all about the dollar ($), and it's role as global hegemony, where post World War II its imposition as the world's reserve currency was in effect de facto / soft colonialism and economic domination. So, gold's rise since 2001 is actually the measure of global de-colonization in effect, with recent actions taken by Russia in Georgia an acceleration of the trend. That's right, and while Russia may not have the 'superpower' status it was credited with up until the Union's fall, which accelerated with the dismantling of the Berlin Wall in 1989, it has been re-organized under Putin into a regional power of strategic (perhaps supreme with its energy related stranglehold on the rest of Europe) importance, both economically and militarily once again.
So, even though the North American propaganda machine may not be making much out of recent events in Georgia (especially with the Chinese Olympics to focus on), characterizing it as something that should have been expected, where the is US on the job protecting its interests anyway, once you understand the above, one can see how this situation could mushroom into something much larger. (i.e. potentially World War III if the US perceives a rapid unraveling of $ hegemony dominance.) What's more, now you may better understand why I was hypothesizing about the takedown in gold (and crude oil) being related to the Georgian situation the other day, because again, in understanding the above, it's not difficult envisioning an escalation of events that could possibly spread to the Persian Gulf (the US could use this an excuse to accelerate an Iranian aggression), turning the larger picture into something considerably more ugly than is presently being contemplated by most.
Now, it's important to understand I am not forecasting this. However, at the same time, it's also important to understand the larger political picture presented above, along with how gold fits into the equation. Here, it should be remembered that whether the process of $ hegemony dominance decay is gradual, or accelerated, which would become a greater likelihood if Russia exposes US military weakness / stress in pressing forward with Georgian aggressions in spite of what appears to be a measured response on the surface by the States, gold will have its day one way or the other. What's more, it's also imperative to understand that gold is not a commodity like the US, central banks, and other irresponsible bureaucracies the world over would like you to believe, but is in fact the true global reserve currency, that being the antithesis of $ hegemony and Ponzi finance credit creation.
Further to all this, and in looking into the future then, it becomes easier to understand why regionalism in economic affairs (a reversal in the 'globalization' trend) will likely accelerate in coming years, spurred on by increasing energy / transportation costs. Part and parcel of this will of course be the decentralization of currencies as centerpiece, likely to become better understood by increasing numbers once gold sails through the $1,000 mark. This is not to say that paper currencies will not survive in altered states as means of exchange given the sheer numbers (of people and digits) involved at present, however once the hyperinflation (first) / deflation (second) cycle matures further, international trade will need be facilitated with at least a gold backed cover clause on local / regionalized specie.
Moreover, and in a larger context, this is what Jim Sinclair is referring to when he uses the term Federal Reserve gold certificate ratio, referencing the likelihood that at some point, potentially as soon as next year if the credit crisis keeps unraveling at present trajectories, foreigners will stop taking $'s for goods (think oil, manufactured goods, etc.) unless some degree of convertibility into gold is attached to the currency. And this might be just the beginning of process in this regard, where it's not inconceivable that if hyperinflation were to grip macro-conditions on a global scale, gold related reserve ratios would need to be continually 'jacked up' to ensure payments in real terms did not decay to an appreciable degree prior to delivery and / or sale of the product. In this light you can of course see how hyperinflation must necessarily / eventually fail (and would be limited in a global context) because logistically it's impossible to do business profitably involving long distance procurement of goods and raw materials in such an environment.
Knowing what we know concerning the above subject matter now, it's time to turn to the charts to see what condition our condition is in concerning the precious metals markets. To say the least this has been a nasty week for both the metals and their related equities, where as pondered previously, it's almost as if the US was attempting to show Russia who is really boss in driving both precious metals and oil into oversold extremes on the dailies (and some weekly plots) not seen this decade. (i.e. since the beginning of the bull markets.) For this reason, many commentators are out calling this a great time to buy precious metals on the cheap. And with respect to the metals and liquid shares, I do agree, where although present proximities could be retested once again if liquidity conditions turn sour this fall, buying here for the long-term appears to be a 'reasonable prospect'.
In terms of juniors however, where until credit / stock market conditions stabilize, one must remain cautious, as reaffirmed on Tuesday, remembering venture companies depending purely on investment capital to survive are still facing an increasingly hostile environment, and for this reason, should be considered 'high risk' enterprise at this point. Not surprisingly, this understanding has escaped many, but may become more apparent this Fall if swooning stock markets, and a resulting contraction in margin debt, force even more liquidations of shares, not to mention operating capital for many companies would become exhausted / strained under such conditions. So remember, in spite of the above understandings, now is not the time to become increasingly aggressive with the juniors just because gold and silver are likely to bounce here. (i.e. don't forget the measured move [MM] in the S&P / TSX Venture Composite Index [CDNX] attributable to the descending / contracting triangle is projecting a decline to 1300, possibly as soon as this Fall.)
That being said, a bounce in the sector does appear in the cards given oversold readings at the moment, where it's not inconceivable gold could rally back up into the $900 area without much difficulty at all. Here, the reason we site $900 as a likely interim topping point barring the political / currency related escalation discussed above is because of a build up of speculative interest in the December Series (most popular) COMEX call options at this strike price, which will tend to hold prices down. I know that based on past experience there are those who believe a build-up of calls at higher strike prices is bullish because the 'smart money' is suppose to 'know something', but this is not the case. In fact, this practice has just the opposite effect, holding prices back because the bureaucracy's price managers use sentiment spikes in paper markets to push prices around.
This means that if it were not for the huge growth in paper related alternatives to physical gold (futures, futures options, and ETF's), rising inflation and commodity prices (chief amongst them being crude oil) would have pulled all precious metals (including the share markets) far higher than was experienced, where it's not inconceivable the metal of kings could have already touched the 1980 CPI adjusted peak pricing, which is in excess of $2,000, more that twice the nominal top of $1,000 witnessed earlier this year. Most people don't understand this however, which is why it's easy for price managers to keep a lid on prices despite all the various forms of inflation floating around out there that continue to be inappropriately accounted for in money supply measures. (i.e. this is why we need gold as a true barometer of inflation.) What's more, with crude oil overbought on a longer-term basis, and likely having to more fully digest a speculative bubble before pricing stability returns, this will also continue to create headwinds for gold into Fall months, at a minimum.
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Good investing all.
