Thursday, October 08, 2009

Gold Breakout, Buy Gold! NOT!!

Nice gold breakout charts! Thank you for sharing. However, I must tell you that you are about to miss the boat. The time to buy gold was in 2000, right at the end of the last technology bubble. Today, we are right at the start of a new technology bubble. The hot computer during the last tech bubble was an expensive desktop. Today, week after week several Smart Phone models are being announced and each of them has more computing power than the desktops sold 10 years ago. Indeed, a whole new class of computer, the electronic reading tablet, is seeing rapid sales growth. These new hand held devices, particularly the Smart Phones, will do so much more and yet they cost so much less.

Gold is in demand, just in case Iran goes ballistic, but Iran is under growing pressure to back away from its nuclear weapon development program. When oil was selling for $150 per barrel and expected to go higher, Iran was king of the hill and Amadenijad thumbed his nose at President Bush.

Oil at $70 still gives Iran great power. However, 200 billion barrels of oil were discovered in the past year and hydro-cracking technology has increased recoverable reserves of natural gas by absolutely huge amounts. Forced US auto fuel conservation is going to lower demand in the years ahead just as one nuclear power plant after another goes on line in China, India and in many other nations. Oil will gradually settle down to less than $35 per barrel and before the start of the next run it may well hit a bottom of $20 or so.

Many folk have the words of Milton Friedman planted in their brains; inflation is the monetary problem of too much money chasing too few goods. This is the correct understanding of inflation, but an important corollary is not appreciated. Disinflation occurs when too many goods chase too little money. While I can hear the laughter, I remain serious. A few billion people, including Chinese and Indians are producing excess goods while maintaining their cultural stance against leveraged spending. The Chinese are going directly to battery powered scooters charged with nuclear power plants. China's nuclear power assembly line is likely to produce nuclear power at the equivalent of $30 per barrel of oil, possibly much lower!

Yes, in the USA, the FOMC has loosened the money strings and ballooned its balance sheet. The massive stimulus offered by the FOMC is smacking up against the first serious de-leveraging by the public in many years. The net net is that excess money is not being printed. Deflation is still the word of the day because there are excess houses, cars, computers, natural gas and other goods. The public is taking advantage by substituting low cost goods for expensive goods. Several magazines just closed-up shop because the public is substituting web pages that have a marginal cost of zero for these expensive magazine pages.

This week, Australia was the first major country to snug-up interest rates. As the economic recovery takes hold (and the technology growth expands), other countries will follow Australia's lead. Real interest rates are going to attach themselves to gold, like shackles on a prison chain gang. By the time the public hears about Iran's next move, Gold will have responded, but if the move is up, it will not be able to run far. If Iran makes the smart move of accepting the offer of uranium for peaceful purposes, the elimination of the fear factor will cause the price of gold to suffer and, throughout the recovery, the prospect of rising short rates, above the inflation rate, will send the real gold price lower.

in reference to:

"Rather than rally, the American currency has embarked on another southbound journey and this is extremely bullish for gold."
- Gold Breakout, Buy Gold! :: The Market Oracle :: Financial Markets Analysis & Forecasting Free Website (view on Google Sidewiki)

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