Steven P. Orlowski's  Instablog

Nearly five months ago I wrote a post here at SeekingAlpha.com outlining reasons why investors must own gold.  At the time gold had been trying it's darnedest to move higher to then retest that psychological threshold of $1000.00.  Every rally would elicit cheers from the goldbugs and inflame the ire of the deniers.  The facts seemed to be in place, but the argument wouldn't be settled (OK, it will never be settled) until $1000.00 was not  just revisited, and not just surpassed, but exceeded and as I wrote elsewhere, exceeded on a sustainable and, (say it, say it), permanent basis. 

Recent articles by the gold perma-bears, one notably in a recent edition of the Wall Street Journal, labeled gold a bad investment.  This I fail to comprehend.

Now I'm no gold bug.  But I am a bull.  The story since May has not changed, and as a matter of fact, it has gotten stronger for gold, as well as other precious metals.  A visible change in the air has been much more coverage in the media regarding the replacement of the US dollar.  Here again, the rumor mills churn, with supposed secret meetings between various governments, public statements from world leaders condemning the dollar and warning the US, followed by denials, and on and on.  If one wants to be bullish on the dollar this argument is a pretty stable foundation to stand upon.  Don't be naive, I say.  Yes, if in fact the dollar is to be replaced, and if we are to believe that other countries are working out a plan to do so, then one must own gold.  Frankly, it is not crazy to think that at the very least they'd be discussing the possibility.  Except for the dollars deep entrenchment in global finance and trade and the difficulty of replacing it, it probably would have been replaced already.  I won't regurgitate all the points here, but consider China, and the difficult job it has of caring for it's investment in US denominated assets and it's clear desire to be rid of them.  Talk about a rock and a hard place.  Sure, the US can proclaim the security of the dollar as the world's reserve currency, if only because of the great challenge of replacing it.  Unless the US pulls a rabbit out of it's ragged hat, the dollar will be replaced.  It may be by a basket of currencies, and it will likely take many years, if not decades, but the trajectory is down, and accepting that argument, the trajectory for gold is up.

The other major point for gold is inflation.  Now, we all know that dollar devaluation is inflation, so assuming a return to economic growth, coupled with the governments need to devalue the currency, then inflation is in our future.  The discussion revolves around the pace of inflation; hyper or otherwise.  If one believes this economy is in recovery, and that the stimuli over the past year have done the trick, then again, buy gold.  It's that simple.  A global recovery will in fact send gold higher.  Right? 



Finally, that dastardly number, 1000.  The chart had been showing the clear development of a head and shoulders formation.  Everybody saw that.  The fundamentally oriented gold bears ignored it, the technically oriented traders wondered whether it was an indication of a bullish move through $1000.00.  It has proved to be so. 

Now, the $1000.00 question is, will it hold?  So far so good.  But gold is fickle.  And a move below that level will elicit a nauseating rash of bearishness, which will likely turn into a sell-off, pushing the price lower, substantially even, giving gold bulls another opportunity buy again and profit accordingly.  Fundamentally gold should go higher.  The story hasn't changed, it's only gotten stronger.  Technically gold needs to stay above $1000.00 for a while to convince more investors that the floor is in. 

Either way, both bull and bear beware.  The next move, higher or lower, will likely be a violent one.


Disclaimer:  I own DGP, CEF, GLD.