Gold and Dogma

Some analysts believe that gold has bottomed . I think they may be missing something important. The global financial game may have changed because Europe is being seen as more of a basket case than the US.

Yes, gold was oversold and needed to bounce up. The problem flows from the first two charts below (courtesy stockcharts.com):

First, gold is in a bear trend and the upward technical reaction seems to be stalling at $1630. There is still a prevailing bearish target of $1370. Of course this might change - which is why we have to look beyond one chart.

Second, whilst the US Dollar is also in a bear trend it gave a buy signal on December 13th, with an upside target of between 87 and 94; and with both targets being above the descending red trend line.

Technically, the US Dollar has bottomed. The less sensitive 3% X 3 box reversal chart of the US dollar below shows a "double bottom" at 73.11. If the index rises above 89.9 (hasn't happened yet and may not happen) then this will represent hard evidence that we will be facing a new ball game.

The issue seems to me to be that gold is losing its appeal as a currency of last resort relative to the US Dollar.

The goldollar index (Gold X USD Index) appears to be trading in a (bearish) descending right-angled triangle (chart courtesy decisionpoint.com).

Also, when you look at the chart of gold divided by the USD index you see that gold has actually given a sell signal relative to the dollar - on the LESS sensitive scale of 3% X 3 box reversal.

Below is one example of what might emerge in a global economy that continues to weaken:

The ratio chart of gold to $CRB (commodities) also gave a sell signal (gold weakening relative to commodities).

Based on horizontal count, the target destination following this breakdown is 492.

But, if you look at the less sensitive chart below, if this target is reached it will represent a serious sell signal because it will have broken below a quadruple bottom.

Why would gold fall relative to commodities?

Because it has been rated as a currency up to now and has therefore outperformed commodities. If the ratio of 492 is reached then this will be a signal that gold will once again be seen as a commodity and it will be seen as anoverpriced commodity.

Why would it be seen as a commodity rather than a currency?

It could happen if the US Dollar index reaches 87 - thereby entering a bull trend.

Why would this happen?

Because Europe is a basket case and the Chinese economy is slowing and China wants a weak renminbi.

It doesn't follow that the long term portents for gold are bearish - but I think that a lot of short term oriented goldphiles are going to get burned before market forces finally prevail over the actions of the US financial authorities. The "Establishment" (led by the Central Banks) is fighting for its life.

The bottom line, in my view, is that the world economy cannot be fixed unless the Central Banking system is disbanded. Central Banks are part of the problem and, therefore, cannot possibly represent part of the solution. But it doesn't follow that gold is "the" appropriate alternative. There are other alternatives. Arguably, we are facing a Post Industrial Revolution era. Arguably, the "old rules" won't apply in a totally new paradigm of human existence. Gold, by definition, is part of an "old" thought paradigm - one that came into being when the world's population was only a few million people.

However, for what it's worth, I think the global economic and financial problems are soluble. The missing element is "integrity". Those who believe that, by embracing gold standard integrity, will be "forced" on the world's financial authorities are, in my view, dreaming. What the world needs is new thought paradigms that will be appropriate for a planet with a population of up to 9 billion people. A new day is dawning and we have been witnessing the last finesse of an impotent Establishment. Humanity needs to adapt or die. My bet is that we will adapt.

Brian Bloom Author, Beyond Neanderthal and The Last Finesse

www.beyondneanderthal.com