The Truth About Gold

 |  Includes: GDX, GDXJ, GLD, GLDX, SLV
by: Gary Tanashian

The latest public sentiment data from 1/4/11 shows that enthusiasm was muted for that stodgy old monetary metal, gold, as compared to copper, silver and other commodities. This makes sense as we are on the go-go growth trade right now. Gold is more a counter-cyclical asset. Of more concern to the various substance addicts playing in the broad casino should be the gold-silver ratio and its implications if it should confirm the global anti-party, the USD.

But for now, we just look at nominal gold because surely there is mounting concern out there. A couple points: a.) As human beings -- part of a society that we would like to see succeed -- we should not want to see gold and the "Go Gold!" crowd succeed; but b.) they probably will succeed, after their herds are summarily tested and the weaker ones punished. That is because we have monetary alchemists running the financial system, and my belief is that ultimately you cannot succeed by implementing amplified versions of the same policy that killed us last time.

This is the gold market, my friends. You have resolve, you manage risk, or you are collateral damage.

As to the chart below, it shows that the weekly view reveals such terror that I just don't know if I can bear to look at it. Well, okay, I will force myself to see the supports at 1340's +/-, 1260's +/-, 1200 +/- and yes, 1000. One freaking thousand dollars an ounce, for insurance. Really, if you are committed to honesty in your financial views, you realize that gold is simply about value and even in the (in my opinion, at least) unlikely event we are going to 1000, it would be healthy to realize that the lump of heavy and hyped metal has retained value wonderfully for 10 years now. This would be the case even at $1000 per ounce.

[Click to enlarge]

Click to enlarge

Here is something you should know about me: I am in a near constant state of unease when it is all too easy, when Austrian Schoolers and Gold Bugs are confidently spouting inflation dogma and when this stuff shows up in the mainstream. I am comforted in times of doubt, because those are the only times I am able to distinguish myself ... as nobody wants to listen to cautious people when the party is on. There is too much coin to be made running the trend. I sometimes wonder if I am not bludgeoning our subscribers with all the risk and caution talk. But I realize that after a settling-in period, most seem to appreciate seeing the whole spectrum of possibilities, from which they make their decisions.

I have tried to convey that, yes, we are on an inflationary continuum by showing what I think the treasury bond market ultimately is -- a lever used to pull the crank on inflationary policy (to varying degrees) over decades -- and more recently, the big picture of the "bank loans" continuum, which is a good way to view the "success" of such policy, as the velocity of money has remained in a big picture uptrend, despite some cataclysmic dives along the way. If long term interest rates break the monthly EMA 100 and trend upward, things are going to go asymmetrical.

If they reverse lower into a deflation issue (not real deflation, mind you; it has never been, for as long as the continuum has been running), opportunity will arise. With this week's position in (IEI), by the way, I take my first step in this direction. The shorts on the broad markets are at this point not so large, and indeed the charts of the three January longs I am playing suggest further upside, at least for some stocks.

But to paraphrase Sgt. Barnes in Platoon: "If the machine breaks down, we break down ... and I'm not gonna allow that to happen." Indeed, these "plays" last as long as the market remains intact, or hopefully to their chart objectives.

But this started out as a gold post. If gold finds itself at a thousand bucks, the herd will once again not capitalize because its perceptions will be all ... SNAFU, if you will.

Stay cool out there. Things may get interesting before January is done.

Disclosure: I am long IEI.

Additional disclosure: Long a high quality core of gold stocks, long a few "plays," initial shorts on broad market, long USD.