The basic notion of the gold conspiracy theory is that the central banks and major firms have colluded to artificially suppress the price of Gold, much to their mutual benefit. Whether true or not, this theory feeds the fantasy of the small speculator uncovering a cartel of bandits and using this knowledge to make his fortune. It is David and Goliath all over again.
In my humble view, Gold trades no differently than any other commodity such as sugar, coffee, oil or even lean hogs. All of these markets adhere to basic price structure limits and Fibonacci projections in the same exact way. Thus, if Gold is being manipulated, would it not be expected to behave differently than the other commodities?
What is meant by manipulated anyway? Those with more power and money will ALWAYS be in the driver's seat relative to those without such advantages.
But, for the sake of argument, I will assume that there does in fact exist a gold conspiracy. My question flowing from this assumption is: HOW DOES THIS CONSPIRACY THEORY HELP ONE TO PREDICT THE PRICE OF GOLD? In other words, does it have any value in terms of timing the gold market?
I believe the clear answer is that it is NOT a methodology by which to predict market behaviour. It amounts to nothing more than what the news media does every day; that is, attaching a "reason" for price action after the fact. For example, if the DOW is up in the morning, Reuters may issue a blurb stating something like: "Investor's encouraged by high GDP data". Then, by the afternoon, IF the DOW has sold off, they issue another blurb stating: "Investor's worried that high GDP will mean Fed keeps raising interest rates". It is really quite bizarre to behold.
Is this any different than what Bill Murphy of GATA has to say? If Gold is soaring and bullish sentiment is high, he may go on financial TV and say: "The Gold Cartel's game is finally over and the levee has broken . . . Gold will be trading at $1000 by X-Mas 2006". If the gold market gets a horrendous sell-off, the conspiracy theorists will then tell you: "SEE! I told you Gold was being manipulated by the Bullion Banks . . . you should listen to me". But the reality of the matter is that the price action in gold is NOT proof of ANYTHING other than futures contracts being bought and sold. All of this amounts to is the natural human tendency to attach reason to that which is emotional, herding behaviour. It is reactive; not predictive.
The best fundamental argument that I read most from the Gold Bugs as to why gold is headed straight to 1000 is that "Helicopter Ben" is now in charge and thus the gold market is going straight up as the world's reserve currency is going to be devalued. What one must remember though is that the "throwing cash from helicopters" comment was made during the first phase of the secular bear market in stocks (2000-2003) when deflation was actually occurring: Bernanke's notion is that he can print his way out of a Kondratieff Winter phase once interest rate cuts no longer provide any re-flationary effect. BUT ... if he prints, he destroys the bond market. If he destroys the bond market, he destroys all that easy credit that he tried to push in the first place! The Kondratieff Winter is about purging DEBT and thus popping the credit bubble built up in the Kondratieff Fall. There is nothing he can do to prevent it though he will probably print and this is no doubt good for the gold bugs. The question is WHEN?
In my last article on Gold I suggested that the cyclical bull market from 1999 was coming to an end and that piercing the $500 level and falling back beneath might be the sign that it was over. In retrospect, it was not over as gold rallied smartly right up to the $575 (spot) level as the XAU hit an historical band of resistance and failed. Here is what is fascinating about that price to mark a significant top:
- The rally lasted a LUCAS 76 months (time)
- The rally was EXACTLY a LUCAS 322 dollars from low to high (price)
- IF gold were to head back to a LUCAS 199 dollars, it would decline a Fibo 377 dollars back down from the recent high.
- The .618 retracement back to the 1999 low is $377 (which is also a fibo number). Other significant fibo retracement levels are also ALL either Lucas or Fibonacci numbers.
Yes, this is technical speculation and it is only one of many ordered paths that gold may choose to follow before it ultimately heads over $1000. But, it is possible to speculate further by using stock market technical patterns and blending them with the gold bug's greatest fundamental argument. Here goes:
Since March 2003, an economic expansion has been underway and we have had inflation. The fed has been raising rates to "fight" inflation. In my view, for technical reasons, the bull market in stocks that started in 2003 is not even close to a termination point and likely will not be until the end of 2008 - although we are likely going to get a nasty 20-25% correction during the second half of 2006 into the four year cycle low.
Thus, this Bernanke "strategy" of printing one's way out of deflation is a few years off in the distance. For this to occur, the stock market must collapse & interest rates must fall to almost 0. The gold market will likely sense a rocketing into hyper-inflation at least a year before it shows up in the stock market. This perfectly fits a gold bottom in 2009 and a bottom in stocks in 2010. A final bear market bottom in gold in 2009 would mean a 29 (LUCAS) year secular bear market in gold from the 1980 high to the 2009 low.
This is all fine speculation but one thing is for certain: IF gold hits 199 in 2009, NOBODY will be bullish. This would be great for the few gold bugs left hanging around and fit the market's logic of starting a real bull market when nobody is paying attention.