Principles of the Stock Market

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Have You Seen This?

Have You Seen This?

GOLD’S GONE SOMNOLENT.  Written August 28, 2009.  The price of gold has gone so quiet, I post it on my wall charts each morning and then forget about it.  So let me bring up, and verbally visulize for you, a longer range chart for perspective. 


REVIEWING.  Ok, looking way, way back I see gold blowing its top in the 1979 to 1980 time period.  And it took some 20 YEARS to get it bottomed out and moving up again.  (Which reinforces my writing on Wednesday, pointing out how respected market writer John Hussman says busts which result from a change, and change, the underlying fundamentals take a heck of a long time to come back into favor– in gold’s 1979-80 case disinflation and oversupply took over from ever rising inflation, even, at the tail end, runaway inflation.) 


TODAY.  But back to the present.  Gold finally began a new bull market about 2000.  And has risen back to its old 1980 top of about $1000 an ounce after eight years before going flat in March 2008.  Since then not much at all.  The price peaked at $1032 and retreated to $682 but generally has traded between $850 and $975.  Sort of waiting, waiting, waiting.  Likely to see what really lies ahead after the turmoil of the last two years.  Was the commodity spike in 2007 just the first leg up in a inflationary bull market?  Or was the collapse in commodities in 2008 the beginning of a new cycle of deflation?  As of today we still don’t know.  Most feel rising inflation is inevitable as soon as the economy really recovers and thus money velocity speeds up from its current very, very lackluster pace (because of lingering FEAR).  Whilst contrarian Elliott Wave guru Bob Prechter, contrarian economist A. Gary Shilling and a few others expect last year’s collapse to morph into full fledged deflation.  Mr. Prechter says deflation lies ahead because of a coming debt implosion which leads to bankruptcies galore, something which the Fed can’t stop. 


Schwartz View:  Right now I side with Mr. Prechter and thus remain very cautious on stocks and am monitoring renewed investor optimism slowly coming back all over the globe as stocks rise and the economic statistics improve.  I remain skeptical of the stats because I look around and see a world of total SPIN and a still deeply entrenched MANIA all around me in spite of the recent credit freeze up and resulting recession.  Very near term then, while we wait for more long term definitive evidence, I assume the price of gold depends a lot on the next Federal Reserve FOMC interest rate meeting scheduled for September 22-23.  If they decide to extend their various programs like buying US Treasury and other government debt, gold may break out above $1000.  If not, no.  As a trader I would thus buy below $900 if it drops there in the meantime.  Longer term, there also remains an open question whether gold could be the one commodity exception, that it would hold up if the economy falls into deflation.  It just might as gold has long been looked upon as real money and a store of value in a world gone mad.  Hard to say because from July 2008 to November 2008 gold fell with the stock market but before and since, during the bear market and now during the five month mini bull market, gold has at times moved with the stock market and at times against it.

Posted 08-28-2009 8:35 AM by Richard Schwartz