Higher gold prices will follow higher oil prices like night follows day
Posted on 08 May 2008 with no comments from readers
The current dollar rally is an unsustainable blip on a long road downwards. There is no reason to think it is anything else. Economic conditions around the world and particularly in the USA are still deteriorating.
And higher inflation rates are being produced by deliberate monetary stimulus designed to keep this patient alive. As in the late 70s this means higher oil prices and a far higher gold price. Gold and oil have a 90 per cent price correlation so this is inevitable.
Gold went through $1,000 an ounce in March and has since fallen back to around $850 – still above its $800 200-day moving average, always the lowest point in this gold bull market.
This reflects the rally in the US dollar, and a temporary overshoot. That is the way with markets. They do not move up in a straight line. $1,000 is a psychological barrier that may take another attempt or two to pass decisively. But it is inevitable in a world of high monetary inflation that a safe haven will be in demand by global savers.
There is also a seasonal trend to gold with religious festival buying in a dip now until the late summer. This is surely the classic buying opportunity in a bull market, a temporary lull in a raging bull market. Expect to see fireworks this autumn as investors begin to look beyond the US presidential election and wonder what President Obama will mean for the global economy.
Democrats are generally government spenders, and that has implications for borrowing and that will be another dead-weight on the US dollar. There will also be doubts about a new administration without, presumably, Bush heavyweights like Paulson as Treasury Secretary. And, of course, the economic fundamentals of a crashing US housing market will still be unchanged.
I think this will end up in a real dollar crisis with the greenback hitting $2 to the euro, and a major stock market crash, perhaps as soon as next February. Only when this blow-up is over can we start looking for a true market bottom, and the immediate result will surely be a flight to safe haven assets like in 1979-80 when gold spiked to an inflation adjusted $2,300 an ounce.
If 2008 is proving a difficult year for investors globally, then 2009 will look like the trauma room in a casualty hospital. The best insurance policy will be to stock up on precious metals and related assets this summer, and sit back while an oil price spike sends an already weakened US economy into a very deep recession.
Then if you hold gold you will be able to rotate out of precious metals and back into stocks while the prices are low. An alternative strategy is to short stocks into next spring. The current US dollar and stock market rally is a sucker’s rally. Don’t get caught out!
