Bond Yields and Gold

The chart below - courtesy Decisionpoint.com - says it all:

In early 2006, a 25 year downtrend line was broken to the upside.

Yesterday, a shallower 27 year downtrend line was broken to the upside.

Until this break-up there was a possibility that the Fed had switched its emphasis from managing the Money Supply to managing the Price of Money. The "markets" have spoken. The game playing by the US Fed is over, and the markets have won. Forget about a Dow Jones Industrial Index entering a parabolic rise. The markets are saying "no". (We can thank our lucky stars. It would almost certainly have happened if the Fed had continued along its existing path - but now the risk is to the downside).

Of interest, one implication of this break up in yields is that there will likely be a strong dollar, and we can now expect the dollar to break up from the apex of the triangle which its price had been approaching over the past few months.

What will this do to gold?

Well, it depends on what really drives the gold price.

That gold is a "store of value" is a well accepted argument. The fact is that its price in dollars per ounce has risen from $18.95 in 1913, to (say) $675 in 2007. This reflects a compound growth rate of around 3.9% p.a.

By way of putting this into some context: You could have bought a Model T Ford for $990 in 1913 (it subsequently fell to $440 when Henry perfected mass production). An equivalent $990 car today would probably cost you $36,000 if car prices have been rising at 3.9% p.a.

Yup, Gold probably is a reasonable store of value. Today you can get a better car than a Model T for that price today.

That it is the "currency of last resort" is a nonsense. Gold never was, is not now and never will be a currency. Yes, for a short period - from 1717 to 1913 the world was on a "Gold Standard". In the context of gold's 5,500 year history, this is the blink of an eye; around 3.6% of its total history, as a matter of fact.

The reasons for Isaac Newton's Gold Standard go beyond its role as a currency - as I will demonstrate in a forthcoming article to be published on Gold-Eagle within the next week. The real value of gold is unrelated to money.

If I am right, the Monthly chart below - of the Goldollar Index - will not break down as the US Dollar breaks up (It too is within the apex of a triangle)

If I am right, the goldollar index will break up through the third fan line.

If this happens, the world will (finally) come to realise that gold has a value which transcends its spurious identity as a currency of last resort. It will unshackle itself from all the prejudicial arguments.

The fact is, that when you measure gold's inverse performance relative to that of the US Dollar, gold has been rising much faster than the dollar has been falling. That is why the above chart points "up" and is not a horizontal line.

Oh Yes! Gold has a value alright.

Stay tuned.