Thursday, June 26, 2008

Gold: Safe Haven in the Approaching Perfect Storm

26 June 2008

Today Is a Good Day To Buy... Gold That Is!

I've had little to say about the gold and gold share markets recently.

In essence, the market has been ignoring gold's stellar fundamentals, as most traders remain fixated on declining mainstream investment ideas
the broad stock market indexes, bonds, shares of financial and technology companies, or – of greater relevance to current realities presently topping trends in oil/energy, agricultural and other commodities.

We've talked before about why gold is the ultimate place to be for investors seeking long-term financial security.

Basically, no one anywhere is willing to be responsible in matters of money management.

Governments spend billions (or in the case of the US, trillions) of dollars they do not have; central banks expand the money supply at perhaps five or more times the rate of productivity growth
fuelling the fires of inflation; banks and lenders (until recently) funnelled hundreds of billions of dollars in loans to cash-strapped "home owers" who were permitted to use their homes as automated teller machines; and of course, mainstream citizens – let's call them consumers – remained willing to spend far more money than they were able to earn.

In short, the present environment is "the perfect storm" for precious metal investors. When all about you abdicate fiscal responsibility, investing in gold and silver is the optimal long-term savings and investment strategy.

Today saw yet another episode in the continued unfolding of this drama.

In short, yesterday, Chairman Bernanke of the US Federal Reserve announced that while the Federal Reserve is now willing to acknowledge the existence of inflation, it is so fearful of economic weakness that it cannot tighten interest rates in order to rein in inflationary trends.

Today, in recognition of this dilemma, the bellwether Dow-Jones Industrial Average fell by 358.41 points to 11453.42, collapsing below its previous low for this year (11,634.82) on January 22, 2008. Speculative favourites bit the dust, including perhaps the ultimate "imaginary" stock, Research in Motion, which nosedived by $18.86 (about 13%) today on disappointing earnings news. Speculative Google, a company I love but whose stock I hate, fell by $22.18 in sympathy, though this amount represented only 4% of that company's valuation.

On the mainstream front, the shares of General Motors reached a 53-year low today, on an 11% pullback in the share value of the iconic manufacturer. If you had purchased GM in 1955 and held it for 53 years until today the face value of your investment would have remained unchanged – despite hundreds of percent in inflation since that time! Clearly there is trouble on Main Street as well as in Silicon Valley.

In short, momentum has departed the Dow and the mainstream stock indices. Oil/energy, agricultural and other selected commodities (as represented by the Continuous Commodity Index) remain strong, but they are overbought, and their momentum is obviously fading.

Gary Tanashian deconstructed the present moves in the Dow and in gold on June 24, two days before they occurred. His analytical chart follows:

Momentum has thus now shifted, at least tentatively, to the precious metal sector, led by gold.

I do not recommend – and I am not in favour – of momentum investing. But every now and then, momentum moves to the right place.

I think we are now there.

Clive Maund is one of several analysts who has correctly perceived gold's strength at this juncture:

After being almost every place except where it rightfully ought to be in an economic climate such as ours, the momentum trade has now shifted back to the precious metals, as evidenced by powerful surges today in the price of gold and in the US and Canadian gold stock indices.

Therefore, the stars have aligned on this day, as it were.

Today is a good day to buy gold and gold mining stocks.

In particular, the gold mining shares are again looking strong relative to the price of gold, in the US (witness today's surge in the HUI to gold ratio)...

And in Canada (witness a similar surge in the SPTGD to gold ratio)...

The move from here will not be straight up, but the momentum of the markets is now giving the sane and conservative investment option – gold – the tailwind it needs to lead us into the end of this year.

Momentum is not the right reason to invest in gold, but gold's strength is often revealed in momentum shifts such as we are now witnessing.

Hang on for the ride.

The wind is again at our backs after decades of fighting the headwinds of financial imprudence and speculation.

Enjoy the security and the strength of gold in uncertain times – in today's perfect storm!

My gold tsunami posts are as follows:

There Is a Tsunami Coming in Gold

Gold Tsunami II: Anthropomorphizing Gold

Gold: Safe Haven in the Approaching Perfect Storm

Gold Tsunami III: James Kunstler's Use of the Analogy

Bond Prices: The Seismic Shift That Triggers the Gold Tsunami (IV)

Gold Tsunami V: The $23 Trillion Bailout... and Counting

Gold Tsunami VI: Looking for Patterns in Gold Price Advances

Gold Tsunami VII: This Is It

Gold Tsunami VIII: Gold Mining Stocks Now Participating

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