-- Posted Monday, 3 March 2008 | Digg This Article
| Source: GoldSeek.com
by Howard S. Katz
Most gold bugs devote a great deal of energy to studying the specific investments of the precious metals group. They may analyze the gold:silver ratio. They may study the relationship of the HUI to the price of gold. They may compare the blue chip gold stocks to the more speculative gold stocks.
All of this is very interesting and can be of great value, but there is another approach which takes a larger view and surveys the entire financial field. It then expects each element to play its role, and the harmony of the various parts, if analyzed correctly, can lead to a symphony in which each part confirms the others.
For example, if we step back and consider the big picture, the most important event of the past half year was Bernanke’s decision to begin a series of easing steps on Sept. 18, 2007. This was in total defiance of normal central bank policy, which is to tighten in the face of a general rise in prices. The issue was dramatically put in the wake of the Martin Luther King day massacre at which time Bernanke slashed interest rates with a machete while Jean-Claude Trichet, facing very similar economic indicators, held like a stone wall.
It was a simple proposition in elementary economics that the Bernanke easing would cause the U.S. dollar to decline in the foreign exchange markets. As a result, President Bush convened the Working Group, more commonly called the Plunge Protection Team. For most of the first two months of 2008, the dollar traded nervously just above its Thanksgiving low as the PPT worked out its plan. Then on Feb. 25, the U.S. announced that it would ask the IMF to sell some of its gold (the idea being that a decline in gold would boost the dollar).
The foreign exchange markets fell over laughing. Was this all that the powerful Bush Administration and the mysterious Plunge Protection Team could do? In one day (2-26-08), the dollar fell 0.80 on the U.S. dollar index. By the end of the week, it was down almost 2 points – new all-time low: gold – new highs; silver -- new highs for the move; crude oil – new highs; wheat – new highs; corn – new highs; soybeans – new highs; the CRB index – new highs.
And while these exciting events were going on in the foreign exchange and commodities markets, another element in the financial field was also engaged in deep drama. Starting just a few weeks after the first rate cut the stock markets of the world turned and plunged. The DJI was down 2,500 points in just 3˝ months.
Most stock analysts would explain this decline in simple terms. The world was suffering from inflation. Inflation leads the central bank to tighten credit. And tight credit makes stocks go down. QED. There was only one thing wrong with this logic. The American central bank was not tightening credit. It was easing to beat the band. If we look at Fed funds futures out to the end of this year, they expect the Fed funds (or T-bill) rate to be down to 2%. Then why did world stock markets dive over the past few months? (Even Trichet merely held the line. He did not tighten.)
This is what I mean by considering all of the elements in the financial world. Commodities go up; stocks go down. That makes a lot of sense. But if we add a third element, the easing of the Fed, it makes no sense at all. We need something more than the conventional explanation.
This something is given by my concept of the paper aristocracy. When the U.S. abandoned the gold standard and gave (the Fed and private commercial) bankers the privilege to create money on March 9, 1933, it created a vested interest group who profited from paper money. But unlike the farm lobby and the sugar lobby, this interest group was not content to merely whine and throw tantrums and “contribute” to political campaigns. It actively bribed the leading colleges in the country to appoint its economic hacks as professors and corrupted the teaching of economics in the U.S. It is thus similar to the medieval aristocracy, which was supported by the intellectuals of the Church. Both aristocracies robbed from the common people of their day, but the modern aristocracy robs via the paper money system and the resultant depreciation of the paper currency.
What has happened since Sept. 18, 2007? The paper aristocracy knew that Bernanke was in their corner. But what he was doing was completely unprecedented, even according to modern (banker influenced) economics. The Consumer Price Index came in for 2007 with the highest gain in 17 years. The Producer Price Index had its highest gain in 26 years. In such circumstances, by all precedent, it is the job of the central bank to tighten credit and rein in the explosion in prices. This is what Paul Volcker did in 1979.
To prevent this, the paper aristocracy began a very powerful public relations campaign declaring that the country was on the verge of a recession. A recession is supposed to be a shortage of demand. Well, if we are threatened by a shortage of demand, then why are all sorts of economic goods exploding to new highs? Why are people in country after country around the world rioting for food? This would seem to me to indicate a great deal of demand. Anybody who looks at the facts can see that what is wrong with today’s economic world is a shortage of supply. It was to deny this reality that the public relations campaign was launched. Specifically, since Bernanke was already in their pocket, the paper aristocracy had to put pressure on the European central banks and get them in line. That is why they focused on Martin Luther King day, a day when the U.S. markets were closed. They were trying to panic Trichet into an easing so that Bernanke’s easing would not torpedo the dollar.
This is the explanation which makes all of the elements come together. On Jan. 22, the DJI fell to 11,700, its Jan. 2000 high. This is an important support area. Any technician looking at a long term chart can tell you this is a time to be bullish. And on top of this technical fact, the Fed is easing to beat the band. If there is one thing you learn in the stock market, it is “don’t fight the Fed.”
So the stock market decline of the past 2 weeks might just become a secondary test of the Jan. 22 low and a time to buy the blazes out of the stock market. At the same time, the CRB index and several of its components have been on a parabolic rise. They might be close to overdoing it and ready for a short or intermediate peak. And since the dollar is now in free fall (after the failure of the PPT), it might just fall too far (say to 72, which is the bottom of its channel on the weekly basis chart) and give us a short term rally.
And T-bonds? Well they are working on a double bottom which gives a count to 125. I am not yet sure how this will work into the symphony, but if we can call the stock, commodities and foreign exchange markets, that will be some beautiful music.
This is the kind of analysis we do at the One-handed Economist. You are invited to visit my web site, www.thegoldbug.net. Subscriptions to the One-handed Economist are available for $300 per year. Key turning points seem to be approaching in several major markets. Catching these points will be an important challenge for March 2008.
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-- Posted Monday, 3 March 2008 | Digg This Article | Source: GoldSeek.com
