Gold Is Whispering A Message

The battle between bulls and bears seems to be centred around the two trendlines which have been drawn on the daily chart of the Dow Jones Industrial Index chart below (courtesy Bigcharts.com)

It has been fascinating to see how the rising trendline has been offering resistance and the falling trendline has been offering support. This is highly unusual market action and is the opposite of what usually happens.

Turnover of 86.4 million shares December 24th was low and probably involved window dressing as share prices rose on this low volume only to end their rise at the rising trendline.

The same picture is manifesting on the On Balance Volume chart above. The OBV chart's rise on December 24th stopped at the rising trendline.

The headline below caught my eye on Drudge this morning.

The full article can be viewed at www.telegraph.co.uk/money/main.jhtml?xml=/money/2007/12/23/cccrisis123.xml Essentially, it examines the fact that increasing liquidity facilitated by the Central Banks is not moving through the system. Here is one quote:

"Lenders are hoarding the cash, shunning peers as if all were sub-prime lepers. Spreads on three-month Euribor and Libor - the interbank rates used to price contracts and Club Med mortgages - are stuck at 80 basis points even after the latest blitz. The monetary screw has tightened by default."

In layman's language, commercial banks are receiving cash from the Central banks but are reluctant to on-lend because they are worried about creditworthiness of borrowers.

We seem to be facing an almost "Alice in Wonderland" scenario, where some economists are focussing on the rising risk of an implosion of the entire banking system, whilst the rest of the world blithely goes about its business.

This madhouse scenario is reflected by the following charts:

The first chart - courtesy decisionpoint.com - shows a banking index which has fallen 25% since the beginning of the year (and now seems to be reaching oversold levels)

The housing index chart below has fallen by around 50% from peak to trough in that same period.

The Oil Services Index has risen by 50% in that same period.

The Retail Holders Index fell by around 10% over that same period.

Finally, the Industrial index as a whole rose from a trough of 12,000 to a peak of 14,000 during that same period. (now 13500, around 8% up on the year)

Now, against a background where 66% of the US GDP is "driven" by consumers, the "story" the above charts are telling us is as follows:

• The value of homes is plummeting because the artificial pumping of home prices by easy credit has gone away
• The Banking Industry is wobbling as a result of the sub-prime mess
• Retailers are experiencing a slow down in consumer purchasing (to be expected if people are feeling poorer as a result of diminishing home equity)
• Notwithstanding all of this, the Dow Jones Industrials has been rising - probably on the back of some industries which are benefiting from an underlying sea change in some industries, one of which is the oil industry which is experiencing a honeymoon in its profitability.

It's almost as if the community is experiencing a state of schizophrenic, cross-eyed myopia. Some investors are ignoring the bad news and are focussing on those organizations which are experiencing profitability. They see the storm clouds, but they prefer to see the rainbow.

The question, of course, is: "Are the storm clouds gathering or receding?"

Which brings us back to the first chart above: The bulls are stubbornly refusing to see the bad news, and the bears are steadfastly refusing to acknowledge the good news.

Are there any clues which might indicate how this battle between the irrationally exuberant bulls and congenitally depressed bears is going to resolve itself?

The following chart (courtesy Gold-Eagle.com) is only up to date to August 2007, but you can imagine the subsequent update in your mind by looking at the prices in the chart below it.

Since August, the daily chart below (courtesy stockcharts.com) has risen from around $650 per ounce to over $800 per ounce.

The reader's attention is drawn to the fact that, if the gold price should close the year above $800 an ounce, the monthly chart will have entered a new and more steeply rising angle of incline than that which has been prevailing since the 1977 - 1989 bull market. i.e. It seems like there may be a segment of the investment community that may be getting ready to stampede. (Note that on the daily chart above, the triangle consolidation may be positioning for a break-up given the series of rising bottoms in the MACD histograms).

The chart below is a 3% X 3 box reversal chart of the gold price. Since February 23 rd 2007 it has been calling for an eventual price target of $1403.93, and there is no technical reason to doubt this target.

The question arises: If the gold price storms up to new highs, will the Dow Jones Industrial Index break up or down from its consolidation in the chart below?" (Bearing in mind that this chart is showing a "high pole" which, if it reverses, cold see the price fall back to around 7,500.)

The drama is more easily visible from the chart below - which reflects a 3% X 3 box reversal of the broader Standard and Poor Industrial Index.

This chart is showing a triple top which, technically speaking, represents massive resistance to further upside.

If this resistance is overcome, we might expect the price to rise dramatically thereafter - but within the context of a high pole that previously rose from 800 - 1535. By contrast, if this high pole reversal should reverse itself, the price could fall all the way back to where it started.

Conclusion

There are those who believe that the machinations of the Central Banks are going to result in rampant inflation. The problem is that the article referred to in the early part of this essay is drawing reader attention to the fact that the "liquidising" of the world economy by the Central Banks is not having the desired effect. This may be an early warning sign that the velocity of money is about to start contracting.

Not to put too fine a point on things - in context of the fact that recent market research showed 50% of US consumers are lying awake worrying about how to make ends meet - if the velocity of money does indeed start to contract, then the US economy will probably hit a very unyielding wall.

What will be a "safe haven" if the banking infrastructure implodes?

Watch the MACD histograms on the daily gold price chart. If they enter positive territory (and the gold price breaks up out of the triangle consolidation) then it is likely to keep heading North.

It's impossible to call at present, but the market is whispering that the gold price is edging towards what may turn out to be a very significant break up. Sometimes, whispers are more significant than shouting and screaming. Typically, when the market is screaming, it's too late to act.

Brian Bloom
www.beyondneanderthal.com
27 December 2007

Author's comment

It appears that the authorities have not yet come to understand the subtleties and/or the nuances of the statement that "energy drives the world economy". An unholy alliance between the Banking Industry, the Fossil Fuel Industries, Big Business and the Politicians has given rise to a life-threatening accident that is now waiting to happen.

The time has come for the world to begin migrating to a new platform of industrial, consumer and transport technologies which will be driven by electromagnetic energy. There are three such energy technologies which are introduced in my novel, Beyond Neanderthal, which is targeted for publication in March 2008. The logic which underpins these technologies is compelling. If embraced, they have the capacity to usher in a new era of human evolution.

By means of its entertaining storyline, Beyond Neanderthal explains both the logic and the technologies themselves, and also articulates a clear pathway forward. If taken, this pathway will enable us to extricate ourselves from the quagmire into which we have been led by the unholy alliance of self-interested groups. There is still a window of opportunity to act - but the evidence suggests that this window will begin to close around 2012. Please register your interest to acquire a copy of the novel at www.beyondneanderthal.com.