Gold-The Long View

We always have considerable news and information about gold. Since its spectacular rise from its 2002 lows, gold has captured the imagination of investors worldwide. Unlike other assets gold has its own peculiar characteristics. Some of these are quite mysterious, yet when understood; make investing in gold more predictable.

The Texas Conference of June 2013 has presented some interesting ways to unravel price movement in gold. The first and foremost premise is to determine whether or not we are in a deflationary or inflationary economy. Even though we’ve have unprecedented stimulus programs by the Federal Reserve with QE1, 2, and infinity, we see little improvement in the general economy. Unemployment is not coming down substantially and taxes are rising to provide money to operate the federal government. The added tax burden has drained personal income, leaving us with a mostly stagnant economy. Thos in charge at the Federal Reserve have used the Keynesian model of government stimulus to supplement to loss of private sector income. One theory put forth is that government stimulus did not go far enough during the Great Depression, hence the need for a more extensive stimulus during this severe economic downturn. The one flaw in the new stimulus is that the increased taxation at the federal level is nullifying the effects of the stimulus, leaving the economy is a continued state of deflation.

If we accept that premise, then several conditions must occur for gold to resume its sustained rise. The Federal Reserve has pressed interest rates to near zero. We have yet to see a substantial rise in rates. Interest rates rise when there is greater demand for money in the term of loans. Money created by banks when a loan is given, produces free money in the customer’s account, thus creating more money in the economy. So, first we must see a rise in interest rates. A rise in interest rates signals a movement from deflationary to inflationary condition in the US economy.

A second condition for gold’s next bullish move is for the dollar to rally. Interestingly enough a rise in interest rates also accompanies a dollar rally.
A dollar rally signals a deficit in our current account balance, also an inflationary indicator.

When these two factors, a substantial rise In the US dollar and rising interest rates, we will begin a new inflationary phase. These two triggers will then trigger a rise in gold to new much higher highs.

IN the interim, gold is struggling to find a solid bottom. We may have short- term spurts with gold rising, only to be followed by sell offs to new lows. Support levels are forming at 1150, then 1020-1040 and 905-950. These levels may be tested during 2013 and continue into 2014. You may be able to trade the shorter- term moves but be cautious and always use a stop-loss order. Try to remember that until some of these longer- term factors present themselves that you trade for a shorter term. Until you see a substantial US dollar rally and higher interest rates, be careful.

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