Gold Plated

–How can it not be good news that gold and silver are making new highs? Spot gold made an intra-day high at $1.427.01. But it’s also making all-time highs in pounds. sterling. and multi-year highs in Japanese yen. That’s pretty clear. Paper money is in a bear market.

–It gets worse. The U.S. government can’t even print money correctly. More than a billion dollars worth of new one hundred dollar bills (the Ben Franklins) have had to be locked up in a vault in Ft. Worth Texas. The bills are so high tech that the printers printing them couldn’t handle all the tricks. Ten percent of the entire $100 billion supply was corrupted.

–Or 100%. depending on what you think of paper money.

–Seriously though. of course there can be fraud in precious metals too. There was a big kerfuffle earlier this year when a rumour circulated on the Internet that the United States government sold gold plated tungsten bars to foreign central banks in the 1970s. Gold and tungsten have the same specific gravity.

–If you put them both in a container of water. they’ll displace the same amount of water. And because they have about the same density. a gold-plated tungsten bar looks and feels like a gold-plated gold bar. Counterfeiting Federal Reserve notes is a lot easier. Or least it used to be.

–But here is the question: is gold the new oil? Let’s put the question to you in two charts. The firsts shows crude oil zooming past a falling S&P in the first quarter of 2008. Oil futures and hard assets became the “go to” investments as the market fell. But oil prices (which hit hard at the gas pump in the real economy) peaked out about one quarter later and then crashed.


–Fast forward to today and the chart below. It shows gold versus the S&P 500 since March of 2009. That’s about when the great Bernanke reflation (and China credit boom) began lifting stocks. Gold is set to cross the S&P. The question we’re asking is simple: has gold become the default hard asset to flee to when investors give up on stocks?


–The answer to the question will tell you if gold’s move higher is driven by speculators or by something else. What’s “something else?” Well. gold is money. Oil is not. That’s a key difference between the two commodities.

–Ministers are meeting in Europe to decide how to expand Europe’s bailout fund from €750 billion to something much larger. The Germans are against it. But given the debt problems in Spain. Portugal. and Italy. everyone else seems to be for it. It’s an impasse. The euro is twisting in the wind.

–By the way. that’s another plus for gold. The US dollar index actually moved up yesterday. It measures the dollar’s strength (or weakness) against a basket of currencies. When gold is making new highs against all paper money. even as the dollar gains ground against other paper. you have a strong bull market.

–So why so worried?

–Soaring commodity prices and pie-in-the-sky optimism (a billion tonnes of Pilbara ore to China) are the same indicators you saw in 2008 just before the market rolled over and fell. When commodity investments become momentum plays instead of contrarian plays (where you have to hold your nose and buy). then you should be aware of the danger in the market.

–But here is where the nefarious Ben Bernanke comes in. Our colleagues in the US published a chart (which you’ll see below) showing that 30-year bond yields in the U.S. are higher than 30-year mortgage rates. Is a home borrower in the U.S. a better credit risk than the American government? Is that what the chart is telling us?

–The chart is telling us something more surprising: the Fed has lowered U.S. short-term and long-term rates to the point where it is driving investors into other riskier assets by necessity. The proof of this is that more money has flowed out of bond funds than in to them in the last two weeks. Those are the only two weeks of negative inflows in bond funds since February of 2009. according to the Wall Street Journal.

–If Ben Bernanke can attack the entrenched position of investors in the bond market. he may be able to drive them straight back into the waiting arms of the stock market. You’d see the S&P break out above 1226. We dialled up Slipstream Trader Murray Dawes to ask him about this level.

Murray says 1226 is high point of the range on this bull move for the S&P 500. “To me this is a warning that it could be another false break.” Murray’s theory of price action is based on these false breaks. Right now. he sees the S&P trading action as an indication that the market is very risky. He says it would have to break out above 1255 for him to reconsider the position.

–If you haven’t seen how Murray evaluates the price action on the Australian market. check out the free charting presentation he put together last Friday afternoon. We’ve posted in on YouTube.

Dan Denning
For Markets and Money

Dan Denning
Dan Denning examines the geopolitical and economic events that can affect your investments domestically. He raises the questions you need to answer, in order to survive financially in these turbulent times.

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Chris in IT
“That’s a key difference between the two commodities.” Another key difference is that people can buy gold and keep it. At home, in a box, in a safe or whatever. All those oil futures in 2008 represented actual goods that someone had to actually accept and actually use, as oil stockpiling isn’t really a traders game. The other difference is that now that we can openly speak about Peal Oil without looking like nuts(as OPEC even now admits it we’re past and on the decline). We should consider the actual supply side problem that occurred during that spike. Since oil… Read more »
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