At the onset let me clarify that am neither a Gold bug nor a dollar fan. I believe all assets have their days and seasons. The important thing is if we can identify these seasons. I just think the season for Gold has just begun. Having said that, I do pity these precious metal junkies who for decades have been waiting for the elusive rally in gold and in the process having missed almost all the other cycles. But then is another variety of Junkies who simply try to retrace all seasons to past supports and resistances on some 3D charts and draw their absolutely crazy fantastic conclusions, some of which can make you fall of the chair. I recently read an article at a very famous blog about how the dollar index can rally to 100 and 110 based on some “vodoo” (Technicals) charts. You must understand dollar role has diminished greatly and there cannot be a gold rally and a dollar rally for the simple reason that there cannot be two reserves in place. Even when Gold was at 800, dollars high were 85. How will dollar be at 100 when gold reaches 1300? World does not have that kind of liquidity. And then there is EURO which also has sucked some of the liquidity away from the dollar. So dollar reaching 100? impossible. I mean the charts can be looked at any way…technical charts are at the end of day “An art work” and art is to be best understood as “beauty lies in the beholders eyes”. Now dont get me wrong here. I myself love technicals but technicals should never never never be followed when you seek to draw out a long term pattern. They are tempting as they give you the illusion of perfection in hindsight but try drawing it forward for 5 years and it will hurt you so bad that you might spend the rest of your life nursing the wounds. Technicals should be used for the real short term and you will be fine. Fundamental analysis and pattern analysis should be used when you draw a pattern. When you look at Gold, use fundamentals and pattern analysis as it paints you the best picture.

Thats why I believe the important thing is to recognize the seasons and patterns for each asset and then leverage it to your advantage.

The genesis of fiat currency was “Trust and Confidence”. “In God we TRUST” is what we read on a dollar note. And yet it is hardly God we trust but the US treasury isnt it? Now what happens when a pillar of confidence and trust is shaken and develops cracks? It is the trust that the US treasury will be able to pay me back the money assigned to each note that I hold of yours. What happens over a period of 5, 10 years, the Treasury starts telling you that instead if x dollars, I now owe you only 0.8x and then 0.6x. Well as a friend I will keep adjusting to your problems but somewhere I will snap and say “The deal is off buddy”. We are reaching that state or we have already reached that state. The foundation of the dollar has become weaker. In case of the dollar, not just is the foundation weaker, it is giving way under the enormous weight of its own mansion.

The very TRUST on which dollar was born has been broken. Obviously life has to go on so, where does one put his trust? Nothing left but fruits of the earth which is the much loved and much hated yellow metal: GOLD. This is the beginning and foundation for the pattern analysis for GOLD. The question is can the TRUST in dollar be revived ? If that happens, yo some extent you should see a topping formation in GOLD. Now that is the million dollar question. As of today, there is not even a sign of it. India just came out in the open and backed GOLD against the dollar. China is picking it of the market on a daily basis. So even if the trust has to be rebuild, where will it begin? It begins at surplus nations like India, China, Russia, Brazil, Japan. One out those has already openly rebelled. We know the other is rebelling in secret. Sooner than later arch enemy russia will jump in. That leaves japan and brazil. I do not have perspective on them. I conclude that it will be a very long time before the repair process on dollar can begin. In the meanwhile, who is benefitting? GOLD. What is the amount of surplus outstanding? 3.5 trillion combined with these guys alone. I am not counting EUROZONE yet. If even 10% were to be diversified, we are talking of multiples of this price today. Will it happen? I do not think so. But then am not politician nor advisor on international matters. the reason why I said this may not happen is cause GOLD may not be on sale even at $4000 price as all central banks will hold on. Only US will be selling which will be snapped up in no time. So without much transaction GOLD prices can freeze. I dont know at what price but significantly higher than now. As GOLD start blowing out, you can be sure of one thing, CENTRAL banks around the world will be watching carefully and after a point they will act to manipulate the price again if they want their fiat currency to survive. So be areful trading GOLD on a daily basis as their will days of extreme volatility as your couter party is the central banks and they are the powrful institution on earth. Hence you are warned here before you start jumping onto GOLD. But ultimately GOLD will win but many of the GOLD bugs will also be wiped out in the process.

CLSA recently put it brilliantly “..FED cannot value the 8000 tonnes of GOLD in their vault at market price of 1100 as they will be digging their own graves” FED still values its gold at $42 an ounce cause marking gold up means the complete failure of FED and its currency dollar.

So the very thesis of this GOLD run is not inflation, not quick returns, not deflation, not technical but it goes to the very heart of the monetary system which we invented 80 years back and then modified it NIXON style in 1980. I do not think we will come back to pure gold standard but we will come out with new monetary system soon. The fact that GOLD has sprung out is the beginning of the fall of FED….THE RUMBLING THAT YOU HEAR IS THE DEATH KNELL OF THE FED. That is the only thing am sure about in today uncertain markets.

So folks you can keep looking at those charts and keeping circling those little supports and resistances in case of dollar, but GOLD will move to blowout and out of control much to the bane of central banks around the world.

WHEN TRUST IS BROKEN, WHAT REMAINS IS YELLOW. DISLIKED BY MANY AND YET THE DELIGHT OF THE HUMBLER AND LESS SAVVIER.

Fresbee
Investing Contrarian