Pushing on A String

The Gold Price is telling an important story at present. It's telling us that the days of Financial Engineering are over.

John Mauldin's recent piece entitled "The Panic of 2007" gave me pause. Brilliant as that article was, it was focussed almost entirely on financial engineering and what the financial engineers might do to re-jig the economy.

The issue as this analyst sees it is that the days of financial engineering are behind us. They are H-I-S-T-O-R-Y! One cannot sensibly "fix" a worn out engine which is suffering from a blown cylinder head gasket, piston slap, cracked rings and hairline cracks in its cylinder block. Common sense dictates that one needs to replace such an engine with a new one. I refer of course, to "energy" as the engine of the world economy.

By way of example, if Peak Oil is upon us, and if our environment has already become degraded by the irresponsible burning of fossil fuels by 1.5 billion people, how by any logical argument under the sun can we possibly expect "financial engineering" to accommodate the embracement of yet another 2 billion people into the world economy?

Here, in essence, is the problem:

The markets understand that, for whatever reason, we can expect an era of higher prices for money; but the Fed only has two weapons: It can flood the market with yet more money (which no one in is right mind would borrow if he is already up to his eyeballs in debt) or it can reduce the price of short term money.

Have a look at the following two charts (courtesy Decisionpoint.com):

Anyone who has an even passing acquaintanceship with charting will see that the yield of the 30-year bond is giving off several signals that it wants to bottom out here - if not rise:

• The monthly chart of the 30 year yield is hugging the underside of the falling trendline - having penetrated it twice on the upside in the past two months.
• There are rising bottoms on the PMO oscillator
• The PMO has broken up into positive territory

Monthly charts don't whipsaw back and forth. They reflect investor views as opposed to trader views.

Interim Conclusion

5% to 6% seems to be a "comfortable" level for the long dated yield - if one ignores the possibility of a Reverse Head and Shoulders in the following chart (Courtesy Bigcharts.com)

When one looks more closely, one discovers that the long dated yield appears to be bouncing up off the 48 Moving Average. If the neckline should be penetrated on the upside, then a target yield of around 6.8% will be called for in terms of Technical Analysis theory.

Of course, a rising long dated yield with its 48 month Moving Average bottoming out will certainly underpin the US Dollar, but how can this be reconciled with the chart of the short dated yield on the 3 month Treasury Bills below?

Clearly, with a topping out of the 48 month Moving Average in the chart of the short dated yield, these two charts cannot be reconciled, and therein lies the Fed's Dilemma.

As the chart below (Courtesy Decisionpoint.com) shows; whilst the shorter dated ten year yield is more volatile than the 30 year yield, it eventually comes into line:

And the same thing happens with the five year yield:

So, by forcing down short dated yields, the Fed is essentially pushing on a string. Market forces eventually prevail.

The chart below which compares the 30 year yield with the 3 month yield is particularly interesting:

The last time the Fed moved to depress short dated yields below long dated yields (early 2001) the 30 year yield chart was pointing down. Now, as the Fed tries its same tactic, the 3 year chart is pointing UP. Whoops!

No Sir! Financial Engineering won't cut it anymore. It's like flogging a dead horse. The authorities will have to do something substantial at fundamental level.

From a different perspective, note how stubbornly the $CRB is clinging to its rising channel line (courtesy stockcharts.com)

Note also how the Relative Strength Chart of Gold:$CRB has been showing strength in recent weeks:

If the Triple Top level in the above chart is penetrated to the upside, the odds favour a strongly rising gold price.

Here is a Point and Figure view of the same relationship chart - just to emphasise the point:

So, what is the gold price likely to do - based on the charts, and following the heart palpitating events of the past couple of weeks?

Based on a sensitive scale ($1 X 3 box reversal), the Gold Price is actually showing a bullish low pole reversal.

Based on the insensitive 3% X 3 box reversal, there has been no change in the underlying technical picture since a buy signal was given on February 23 rd 2007.

Overall Conclusion

The Gold Price is telling the story. If the Fed keeps pushing on a string, all hell is likely to break loose and we will enter a period of asset hyperinflation. If the authorities want to get the economy going again, they will have to do something substantial - that has nothing whatever to do with Financial Engineering - to encourage wealth creation activity.

What might that be?

Simple really: It became evident in 1985 that the most recent "driver" of the world economy, namely oil, had passed the peak of its ability to do just that. We need to move to embrace a new driver of the world economy. We need to migrate to a new Energy Paradigm that has nothing whatever to do with fossil fuels or Nuclear Fission. Nuclear Fission is a fundamentally foolish technology which can add no value at all. Apart from all its other shortcomings, it cannot even produce electricity at a competitive price.

But there are none so deaf as those who will not hear, none so blind as those who will not see. The USA even went so far as to deliberately sabotage the possibility of moving to a new Energy Paradigm by failing to ratify the Kyoto Protocols. That little joke has cost us ten years.

Here is a chart of the Uranium Chart (Source: www.infomine.com/investment/metalschart.asp?c=uranium&r=15y)

This looks suspiciously like an exponential blow-off to this analyst as investors rushed into Uranium in 2005 when they "bought into" the idea of Nuclear Fission. Knowing that there are other far more practical energy paradigms waiting in the wings, I wouldn't touch uranium with a barge pole based on the above chart.

Brian Bloom
www.beyondneanderthal.com

Since 1987, when Brian Bloom became involved in the Venture Capital Industry, he has been constantly on the lookout for alternative energy technologies to replace fossil fuels. He has recently completed the manuscript of a novel entitled Beyond Neanderthal which he is targeting to publish within six to nine months.

The novel has been drafted on three levels: As a vehicle for communication it tells the light hearted, romantic story of four heroes in search of alternative energy technologies which can fully replace Neanderthal Fire. On that level, its storyline and language have been crafted to be understood and enjoyed by everyone with a high school education. The second level of the novel explores the intricacies of the processes involved and stimulates thinking about their development. None of the three new energy technologies which it introduces is yet on commercial radar. Gold, the element, (Au) will power one of them. On the third level, it examines why these technologies have not yet been commercialised. The answer: We've got our priorities wrong.

Beyond Neanderthal also provides a roughly quantified strategic plan to commercialise at least two of these technologies within a decade - across the planet. In context of our incorrect priorities, this cannot be achieved by Private Enterprise. Tragically, Governments will not act unless there is pressure from voters. It is therefore necessary to generate a juggernaut tidal wave of that pressure. The cost will be 'peppercorn' relative to what is being currently considered by some Governments. Together, these three technologies have the power to lift humanity to a new level of evolution. Within a decade, Carbon emissions will plummet but, as you will discover, they are an irrelevancy. Please register your interest to acquire a copy of this novel at www.beyondneanderthal.com . Please also inform all your friends and associates. The more people who read the novel, the greater will be the pressure for Governments to act.