Gold Is Speaking

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In the current
global manic rush by central banks to inflate and by governments
to spend that paper, there are a few observers who have expressed
concern that at some future date this wholesale, last ditch
Keynesian and Statist approach just might actually produce "inflation."

Many Wall St.
types argue "No, inflation is not the problem and is not likely
to be the problem for some time. And besides, gold is quiet, not
signaling any concern about inflation." Though they like to
espouse free market generalities from time to time, these same Wall
St. types actually want the State(s) to intervene to protect this
or that asset class – to which they are personally attached
and now sinking with. While investors are down in most asset categories
by 40% in 2008, the orthodox investor and his portfolio manager
can't weather another 20% drop this year! "Oh sure, Keynes
was full of it, but good grief we can't stop this stimulus because
it just might work. It must work!" All intellect out
the window, it's desperation time, wish-fulfillment time on Wall
St! And how short their memories — failure to remember the policies
of the Fed, from August, 2007 onward when the Fed — armed to the
teeth with "surprise" interventions — sought time-after-time
to halt the ratcheting decline in equity and real estate prices.
Was that a success? Or did those penny-in the-fusebox actions merely
delay and therefore intensify the decline to the point where a market
correction morphed into a collapse? So, let's do it some more and
find out yet again! We can then worry about an "exit strategy"
later, we are told.

So, with that
as a backdrop, what has been going on with the various "asset
classes" in recent years? And especially, what if anything
does gold tell us about the risk of inflation?
Is it really
the quiet unconcerned metal that these State apologist economists
claim? Historically gold is a wise metal that often anticipates
inflationary and deflationary trends; defining inflation in the
Austrian School manner — as growth in the money supply (s), which
we now must think of globally, not merely as a U.S. monetary and
fiscal event.

With a few
comments, I provide some stunning charts that speak volumes about
the actual underlying trends, asset value shifts, safety of capital,
etc., all of which are reflective of macro-investment decisions
that are being made, net-on-balance, by millions of global investors.
And they speak volumes!

I begin with
a chart that deals with the question: How have commodities done
as an alternative or "balancing" asset class over the
past years?
In this case I measure the CRB Index's monthly closes
v. the monthly closes of the Dow Jones World Index (data begins
for this equity index only in 1994, therefore the comparative chart
begins then). Well, the answer is pretty clear.

Depending upon
when bought into commodities as an alternative asset class (which
might balance your equity holdings), you either won or lost several
times over that 15 years. In fact an astute trader did well to time
some swings in that relationship. But the long-term answer is that
commodities were really no better and no worse than global equities
over the past 15 years, and presently commodities are actually sinking
at a faster pace than equities. So commodities seem to be unconcerned
about "inflation" at least as mainstream economists are
prone to define inflation.

The same period
of time (1994 to present) gold in relation to global equities. Obviously
something happened to gold relative to global stocks, something
that changed its trend tone with drama in late 2008. The value (price)
of gold in relation to that basket of assets exploded in a quantum
manner, unlike the opposite behavior of the commodity asset class.
Might I point out that the timing of this massive valuational change
in gold relative to stocks was coincident with the panic by governments
to reflate the collapsing bubble that a combination of their policies
has created a handful of years before.

I have watched
gold's behavior v. other commodities for 35 years, and back in the
hyper-inflationary times of the late 1970s' up to 1980, gold soared,
but so did the price of grains, meats, fertilizer, etc. Gold was
not singularly special. It was part of a general commodity bubble.
This time, beginning sharply in late 2008, Gold has made a massive
statement and done it in what most mainstream economists continue
to define as a non-inflationary/deflationary market environment.
Gold says to those economists — define your concepts more accurately
fellows.
There is massive inflation (monetary expansion accompanied
by State power expansion) and it is underway at full throttle. Beneficiary
this time is gold (and silver) – almost exclusively. This explosion
in relative valuation of gold is more historic and dramatic than
any I have heretofore seen. Would not even surprise to see the net
price of gold (v. dollar) engage in something comparable — as investors
channel their bets onto the back of the lone horse that is still
standing and reliable. Though that net price consequence is actually
not a necessary event, because gold already has accomplished its
role as a State-proof investment asset.

Finally, the
chart below shows gold's behavior v. the broad commodity asset class.
For 30 years it moved in a range v. other commodities, no better,
no worse. That sedate range of valuation fluctuation is now over,
done with. Gold has made a statement — if your eyes are
wide open
. Gold sees inflation NOW, and has already begun to
respond in an historic manner.

September
5, 2009

J. Michael
Oliver [send
him mail
] has provided proprietary technical analysis and consulting
for the past 20 years to large asset management institutions. He
is also a hedge fund manager.

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