A Melman Minute
| By | Leonard Melman |
|---|
As we move quickly toward the end of the trading year, we find three of our indicators giving us a somewhat mixed message.
First, please note that the US Dollar Index (DX) chart appears to be moving to the upside from its recent consolidation and is once again approaching a long-term breakout point of just above the '90' level. Of course, based on history, further strengthening of the US Dollar has been negative for the precious metals.
Next, the general US securities markets, as measured by both the Dow Jones Industrials (see 5-year chart above) and the S&P 500 Index continue to move from historic high to historic high and are once again trading to the plus side in early morning action today. Like a rising US Dollar, improving general securities markets have typically been negative for precious metals markets.
The inconsistency we noted earlier is in recent action within gold market. Despite these two seemingly negative influences, the recent upward move in gold has now reached the magnitude of the previous rally and gold trading is also showing another encouraging trend, namely opening with some weakness following overnight trading, but then rallying as the day progresses. While there are many technical obstacles to overcome before we could state with any assurance that a major trend reversal was underway, these are at least encouraging signs for the short term.
Also, and I ask you to utilize a bit of your imaginative powers, there is one possible pattern which might be emerging and, if it follows through to completion, it could become a truly bullish technical indicator. I am referring to the well-known technical pattern known as a "Head-and-Shoulders-Bottom."
In the present case, gold made a relative low in early October near $1,180. It then rallied to just under $1,260 before declining sharply to a new and deeper relative low close to $1,130 before rallying back to the present level just under $1,200. The optimistic case would allow for gold to rise once again to near $1,260; then fall back to about $1,200 before embarking on a new and possibly powerful rally.
Should that sequence occur, we would note that the October sell-off would be the "Left Shoulder", the early November sell-off would be the "Head" and the last sell-off back to the $1,200 area would be the "Right Shoulder", thereby completing the sequence. If this occurs, we would have a "neckline" at the two peaks near $1,260 and if the rally from the "Right Shoulder" then broke out above the suggested neckline, then the market could embark on a powerful technical rally.
All of this is, of course, speculation which might turn out to be idle, but this type of move is possible based on action during the past seven weeks and should therefore be noted.
…….
One of our favourite sayings which is used frequently by the public is, "…Those who fail to learn from history are doomed to repeat it", originally attributed to George Santayana. I find some truth in that saying, particularly as it applies to historic monetary errors of the past which now may be in the process of being repeated.
This came to mind when I read of recent moves by governments, particularly European and Japanese, to stimulate economic activity by money creation and increasing inflation. A new wrinkle was just added when the European Union just announced they were in the process of creating a new $26 billion fund for the purpose of investing in private industry in order to create both wealth and jobs.
Based on many years of study, I can suggest that this is an oft-played game, particularly when coupled with outright adoption of money-creation activities. In many cases, this type of government monetary activity has ended poorly - even tragically - as such stimulation has frequently 'morphed' into that great destroyer of economic and social stability, outright hyperinflation. Four particular cases in history suggest themselves.
As the Roman Empire ran out of new worlds to conquer - and plunder - the flow of new wealth into their financial coffers dwindled, just at the time when the populace kept demanding more 'bread and circuses'. Rome found their answer by debasing their gold and silver currencies by mixing the precious metals content with base metals until, ultimately, the coins became utterly worthless, leading to social dissention, economic devastation and ultimate dissolution of the empire.
During the period just prior to the French Revolution, the financial authorities declared that economic activity was stagnant because, as described in the book "Fiat Money Inflation in France" by Andrew Dickson White, there was "…a great want of the country for more of the circulating medium; and this was followed by a call for the issuance of paper money." The advice was followed and the new currency, named "Assignats", followed - modestly at first and then eventually in torrents, leading to ultimate tragedy.
Of course, everyone is aware of the hyperinflation in Germany from 1922-23 which was based on the German monetary authorities' attempting to meet their various requirements for economic growth while satisfying the onerous Versailles Treaty reparations requirements by simply printing vast sums of paper money. Hyperinflation of the most ruinous manner ensued.
In most recent times, the nation of Zimbabwe (formerly Rhodesia) attempted to correct the economic trauma set in motion by President Mugabe's land management policies by printing wealth. By the time that hyperinflation came to an end with the actual destruction of their home currency, Zimbabwean trillion-dollar notes were being sent round the world to curiosity collectors since they had long since passed any semblance of monetary value.
With these and other lessons at hand, for the nations of the world to attempt once again to "solve" economic problems by various means which smack of nothing less than money creation would appear to be truly a case of "...those who refuse to learn from history…"
I believe that ultimately, the consequences of such follies remains the most powerful argument for an ultimatly historic bull market in gold and silver.
EARLY MONDAY DATA as of 8:00 AM PDT
Dow Industrials, 17,834, + 24
TSX Index, 15,081, - 30
Gold, $1,199, + $1
Silver, $16.43,+- $0.03
Base metals, (average), + 0.4%
Mining share indexes (avg.), + 0.2%
US Dollar Index, 88.23, - 17 basis points
TYX Index (30-year bond rates), 3.030%, + 9 basis points
Crude Oil, $76.61, + 9 basis points