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End Game Dynamics

The following is a snippet from commentary entitled 'End Game Dynamics' that appeared on Treasure Chests this past week. If you are interested in where gold is trading from a Grand Super Cycle perspective, and what this suggests for the future, read on. We sincerely hope you find utility in this work.

Recently we were asked to provide an analysis of gold's long-term history designed to aid a broad cross-section of investors understand where prices are likely heading, and why? The following is our attempt to accomplish this task. This work merely scratches the surface in terms of complexities associated with gold price drivers, as its context is centered in a US egocentric orientation. Further to this, and in an effort to be concise given the scope of factors necessary to bring a comprehensive understanding together, we will assume the reader has a basic knowledge of technical analysis, including Elliott Wave Theory (EWT), and economics. Do not let all the figures below scare you off (20 in full), as this will be a smooth read, where the charts are intended to enhance information transfer.

Gold has been 'money' for thousands of years now, the oldest means of exchange known to man save barter. And unlike 'fiat currency', gold is a store of wealth given it has survived every politically oriented attempt to discredit its value on a lasting basis throughout the ages. The US Dollar (USD) is no different than any other fiat currency in that even though it has been well promoted in the global economy due to American ingenuity, it too will eventually fail. Not since days of the Roman Empire has any civilization dominated known world commerce, as has been the case with America, where seeds for today's international acceptance of USD's as 'reserve currency' were planted at the nation's birth, hinged on beliefs of liberty and freedom, and a now mature economic model ubiquitously accepted as 'the standard.' On the surface, it appears the world has placed its complete trust in the 'free enterprise system', and USD's as facilitator. So it may be surprising to some that in actuality, a rapidly maturing US modeled global capitalist system is likely approaching an 'end' in terms of dominance, where at a minimum USD's will lose reserve currency status, theoretically propelling it's antithesis, gold, to what EWT terms a Grand Super Cycle top. (See Figure 1)

Figure 1

Found within the understandings denoted above is the primary message gold appears destined to vex higher prices in the years to come, with the big question being will its ascent be limited to 'double top' resistance, or will another logarithmic advance like that of the 70's transpire? To gain an appropriate understanding of probabilities in this regard, one must first understand the chain of events / factors required to create sufficient demand spurring a nonlinear progression in gold. As alluded to in Figure 1, gold began to rise in parabolic fashion after it was allowed to trade freely, which was primarily a result of a US forced international / unilateral abandonment of Bretton Woods in August of 1971, effectively removing any vestiges of money supply growth rates tied to a 'reserve standard'. In simple terms this means gold pricing was destabilized when external creditors could no longer make claims against US gold reserves, and were instead forced to accept unsubstantiated fiat specie as an alternative to otherwise un-payable obligations. Yes, foreigners were forced to accept credit from the US, or go unpaid. Thus, it appears it's not only an accelerating currency debasement agenda led by the Federal Reserve (Fed) that will be required to send gold parabolic, but a materially increased perceptual risk of US insolvency, as well.

With this in mind, and evidencing the rapid acceleration of monetary largesse employed by US Central monetary authorities in the 70's to thwart already apparent negative 'secular scale' forces beginning to show cracks in the economy's foundation, gold prices took off with a vengeance throughout the decade. Here is an isolated semi-log picture that displays some technical elements associated with the move that may aid our understanding of what should transpire by 2010 if a truly impulsive advance were to unfold. (See Figure 2)

Figure 2

One should note in the above diagram reference to the fact nominal gold prices must accelerate to approximately $2,500 in order to equal the same logarithmic scale experienced during this 10-year period, a progression that cannot be expected today due to the relatively poor performance thus far. Furthering the process of gaining insights from history, where as we now know, the best comparisons that should aid us in analyzing gold's current bullish impulse will come from the 70's, it behooves us to turn the screws in this regard one more time. Below you will find a simple linear plot of gold showing the dramatic price rise over the period in question. It should be noted that although gold did indeed make a five-wave impulsive advance into an early 1980 top at $850, the basic wave structure of the move was in three distinct parts denoted by the larger numbers. (See Figure 3)

Figure 3

Why did gold make such a dramatic move in the 70's compared to present? Some hypothesize it was due to the fact pricing had been officially fixed since the 30's, and it was pent up demand that ultimately accounts for the grand move. But as you know from our discussions above, a more likely reason is the destabilization the Greenback, and the accelerating currency debasement agenda on the part of Central authorities that goes along with such an advent. This is why movements in currencies, and resultant bullish impulses in commodities are so intense, often resulting in extreme blow-off / parabolic moves in the end. Once confidence is lost a country's 'legal tender' everybody wants out at the same time, and into anything else that will hold value.

As you can see below, commodities appear to be participating with gold in a new millennial bull market; again however, in muted fashion when compared to the 70's on a percentage basis. Whether this is due to secular deflationary forces at work; or, because of official / sanctioned influences on the part of authorities / establishments to affect public behavior is not important at this point, as there should be at least one more meaningful thrust higher in commodities beginning sometime next year if technical considerations denoted below hold water. It is the force behind this next impulse that will be important to gauge correctly in terms of ultimate expectations for the move in its entirety. One should realize that if this next impulse proves to be relatively weak, the 'end game dynamic' message that would be emitted is to expect a harsh Grand Super Cycle correction. The last such occurrence ran from the 1720's right through Napoleon's time, where because of excessive population builds in constrained / matured economic climates, a lack of organic growth possibilities forced extreme measures in men as competition for survival / resources intensified. (See Figure 4)

Figure 4

In the first advance wave marked 1 above, gold outperformed the Commodities Research Bureau (CRB) Index by a ratio of approximately 2:1. In the end however, and as denoted in Figure 4, ultimately gold outperformed the CRB by a ratio of 9:1 at the top in 1980, testament the yellow metal is far more than a mere commodity. If the initial Primary impulses of the current advance sequences in commodities and gold are now complete, which this author believes to be the case, then it's important to note gold outperformed the CRB by only 33 percent, nowhere near the leverage it had back in the 70's. Using the final measured move (MM) target of 400 for the CRB in calculating gold's ultimate trajectory, and reducing the final leverage factor by 77 percent to match the ratio with the first wave, this provides us with an ultimate projection ratio of 2:1 assuming all of the comparisons utilized above prove reliable. Thus, if the CRB is to rise 120 percent from bottom to top in its full advance sequence, gold should rise 240 percent off 2001 lows of $255 for an ultimate target of $867, a double top at all time highs essentially. (See Figure 1)

Evidenced above is the growing complexity associated with investing in today's markets, where it is our belief a solid marriage between both fundamental knowledge and proficient technical analysis is key to enhancing returns for investors, even in secular bull markets, like that of precious metals at present. Many valuable lessons have been learned by gold bugs over the past four years, not the least of which is identifying and owning good 'value' in one's portfolio can smooth out the ride during cyclically based corrections. Further to this, trading a percentage of one's holdings based on proven technical methodologies at intermediate-term 'swing points' can also prove constructive in enhancing portfolio growth, adding to the benefits of holding a strong 'value based core'. Trading is not for everyone, and we do not profess to be 'the answer' regarding any frustration you may have in accomplishing your investment goals. However, as you can see in the generalized example of our work above, every effort is made to aid those who seek our help, both sophisticated and novice. So, if you are interested in both smoothing out and enhancing your portfolio returns in 2005, and beyond, give us visit at Treasure Chests. I can assure you, if you are so inclined, one will not regret this decision.

Good investing all.

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