GoldMoney Alert - 9 September 2007

Finally, $700 - What’s Next?

Gold finally reached $700. Once again gold achieved an important milestone. It took a lot longer to reach $700 than I was expecting, but that's OK. The extra time enabled us to accumulate more gold in the $600s than otherwise would have been the case if central banks weren't selling gold. The pace at which central banks sold gold in recent months rose significantly.

For example, some 67 tonnes were sold in July, which is nearly one-third of the weight of gold newly mined in that month. That high rate of dishoarding makes it appear that central banks were desperate to keep gold from climbing higher as the subprime woes continued to build. Why? Because the message given by a rising gold price is one that the central banks don't like. So they would rather try to kill the messenger than face the reality that the dollar is not worthy of being the world's reserve currency. But these central banks were doing us a favor, enabling us to get rid of dollars and other fiat currencies by buying gold at prices that would otherwise not be possible if central banks weren't dishoarding.

Government intervention inevitably fails. It doesn't change underlying economic fundamentals, and if anything, government intervention messes things up even more. It distorts the market process, giving false signals. People act on those signals, and end up making bad decisions, causing even more problems. Take the mortgage mess as an example. It is now generally accepted that the Federal Reserve under Alan Greenspan kept US dollar interest rates far too low for much too long in the early part of this decade. Money was too cheap, and people borrowed this cheap money building too many homes and condos that only made commercial sense when viewed in an artificially low interest rate environment. Those days are gone.

Today's reality is entirely different. Counterparty risk is becoming increasingly important, as explained in my August 12th alert, "The Search for a Safe Haven".

This search continues, and as a consequence, it answers the question I pose in the title above. What's next for gold? It's headed higher as more and more people come to understand that gold does not have counterparty risk. That it also remains undervalued is another important point that will identify gold not only as a safe haven, but a good valued one too.

The following chart is important. Gold is breaking above the downtrend line formed since the May 2006 high. Also, gold remains within its uptrend channel marked by the parallel purple lines.

The above chart is presenting a very bullish picture for gold. My upside target for gold this year has been $800. To be honest, I thought we would be there by now, but we're not thanks to central banks as explained above. But we have reached a state in the gold market that central banks cannot restrain gold at these relatively low price levels. So I still expect to see $800 this year.

The silver chart is also bullish, but it is not as well developed as gold. It still needs to climb above the short-term downtrend line in place since the beginning of this year.

It will be important for silver to exceed the $13.12 high reached this past July. Once it does, both precious metals will be moving higher, confirming the upside breakout already underway in gold.

The present crisis conditions in the financial markets remind me a lot of the last serious credit crunch in 1974. It too was a global event, with Japanese banks in particular being very hard hit. If this comparison to 1974 is valid, the important point to note is that this present credit crunch has a long way to go. Also, it is useful to remember that the gold price nearly doubled in 1974 as people moved into gold because of its safe haven attributes. If it happened once, it could happen again, and that makes $800 gold look like just a chip-shot away.

Published by GoldMoney
Copyright © 2007. All rights reserved.
Edited by James Turk

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