Gold will thrive on Dollar flight

October 13th, 2008

By: Jean Temkin, Business Day

MORGAN Stanley’s chief economist estimates that the US budget deficit is $2-trillion so, on the basis that the US economy is $16-trillion, this is a huge 12,5% of GDP. Economists have estimated losses across the entire US financial system at $3-trillion.

Given the magnitude of the credit crisis, why scramble after the currency of a country on the brink of recession or worse? Yet the rush for dollars continues.

Would you rather invest in the currency of a country whose financial mishandling has twice plunged the world into economic panic, or in gold?

There was a convincing broken double top in gold during September, giving a count to $1042 and a second count to $1162. As the rand nosedives against the dollar, the rand gold price is of concern to South African investors. The dollar gold price has risen 22% since September 11 while the rand gold price has put 38%. Last week it shot past its convincing R7988 count. There are less convincing counts to R9841 and R13243. Gold shares remain wobbly but gave a buy signal towards the end of September. The gold share index has a count to 2089. Krugerrands have risen 32% since September 11 and have a count to R8601. NewGold (tracking the gold price in rands) rose 32% in the same period, passed its R80 count and is heading for a R93 count.

The chart compares the 20-year plottings of the Dow Jones Industrial (the Dow) and the dollar Swiss franc exchange rate with the dollar gold price. The first one-third shows gold and the dollar dipping as the Dow moved upwards. In the next one-third, the dollar and the Dow correlated, first moving upwards and then dipping together. As they dipped, the gold price began moving upwards. In the final one-third, the Dow clawed back all lost ground and continued upwards, the dollar continued losing, and the gold price surged. The plotting on the far right is a jumble, with the Dow falling heavily, the dollar gaining, and gold first falling and then recovering. From July 2001 until March this year, the dollar lost 46% against the Swiss franc while the dollar gold price gained 277%. If the investing world eventually comes to its senses, and dumps the dollar in favour of gold, gold will confirm the new bull trend.

I received an e-mail from a reader listing the reason why he fears that the current situation could make the 1929 crash look like a Sunday school picnic.

Based on fundamentals rather than technical analysis, he thinks that the gold price will soar to $3000/oz- $5000/oz. He drew my attention to the website of the Gold Anti-Trust Action Committee (GATA) where I read some alarming, but possibly valid, comments that back his thinking.

Goldfields CEO Nicholas Holland says in the annual report that global gold reserves continue to decline by 70m ounces a year — a rate that far outstrips new discoveries and significantly contributes to the growing scarcity of the metal.

As the market did a couple of “dead cat bounces” (upward reversals during a severe bear trend) last week, I received a request from a former subscriber to Ben’s and my long-abandoned newsletter, Temkin & Moon on Diagonal Street. He asked for a “ buying level” for the JSE overall index.

A feature of that newsletter, the buying level, was the point that had to be reached during a week to qualify for a buy, and a selling level was how the index had to fall to qualify for a sell.

The levels were confirmed when the index volumes increased substantially. The current longer-term buying level for the Overall is a rise through 26223, and 23107 in the short term, but as the JSE no longer publishes volumes for this index, I can’t guarantee accuracy.


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