DOES GOLD HAVE REAL VALUE?
Where are gold prices headed?
by Cliff Küle,
November 19, 2008

"I believe that banking institutions are more dangerous to our liberties than standing armies. If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks and corporations that will grow up around the banks will deprive the people of all property until their children wake-up homeless on the continent their fathers conquered." Thomas Jefferson 1802

So what has Thomas Jefferson got to do with the price of gold? ..... read on......

Gold stirs a great debate in the investment world: At one end are those who believe it is a useless relic with no investment value. At the other end are those who "religiously" believe it is the only real money.

Warren Buffet has an amazing way with words: "Gold gets dug out of the ground in Africa, or some place. Then we melt it down… dig another hole… bury it again… and pay people to stand around guarding it. It has no utility. Anyone watching from Mars would be scratching their head."¹ The insanity of gold's role as money probably can't be articulated any better than that. On the other hand, J.P. Morgan simply stated "Gold is money and nothing else."² Both speakers understand the nature of money....one is alive today, one is a historical figure. Will modern advancements make gold useless or will history return gold to its historic role as money?

Cliff Küle won't try to review all the pros and cons in the debate at this time but will make some points that aren't always considered.

First, it is not gold itself that should be coveted as much as it is currency that should not be trusted. In other words, the value is not in the gold. Gold is the collateral that provides security against the power that can be abused. The power to issue note paper and call it “money” is a very great power to hold; it gives power to influence people’s lives, liberty and pursuit of happiness.

Cliff Küle believes that “de-basement of the currency” is a natural process under one of the Laws of Nature….in this case, part of that Law of Nature that says power corrupts. In this respect the word "religious" seems apt - Gold is a testament to the belief that the Laws of Nature will prevail over the laws of government.

Secondly, gold has another value that is often overlooked. Women are attracted to gold and men are attracted to women. There is an intrinsic, natural quality to gold that is part of the circle of life.  Ignore this quality at your own peril.   It is innate; it is natural.  Those who debate that gold has no real value to life (like food) are ignoring this point.  The attraction is not written by any government nor is it the result of any marketing campaign by any corporation.

Diamonds can sparkle more than gold, but currency and diamonds can be manufactured. Gold can't. Once again, Gold is an investment that puts faith in something produced by Nature, not manufactured by people (paper currency or diamonds).
 
Thirdly, there is one point that we never hear mentioned in the debates. It might seem outrageous, but please try to understand that gold offers a way to express faith in the Principles of the Founding Fathers of the United States - to uphold and be patriotic to the principles for which the Nation was originally intended to stand. This is different than the modern-day patriotism that supports anything the U.S. government does. The distinction was well said by Mark Twain: “Patriotism should be to support your country at all times and its government only when it deserves it.”

The Founding Fathers of the United States were clear about what the people should accept as money. It is in Article 1 of the Constitution of the United States that only Congress shall have the right to coin money and later in Article 1 that gold and silver will be the only acceptable payment of debts in individual States. United States governments over the last century have defied both Sections of the First Article of the Constitution!  First, by sub-contracting out the right to coin money.  Second, by eliminating gold and silver’s connection to our money in steps that didn’t cause much debate.

Most Americans seem blissfully unaware that their currency is issued by a private enterprise.   Whether this is the result of craftiness by those in charge or because the citizens just don’t care; the fact remains that it defies the Constitution.

 
      
And now for the short term:   Where are gold prices headed? Indications are beginning to appear that prices may be headed much higher.
One of these indications is the incredible disconnect between physical gold prices and supplies relative to paper gold prices – this disconnect has been discussed on our site www.cliffkule.com.  Some analysts feel that this disconnect, also present in the silver market, may be rectified towards the end of this month through a liquidity squeeze in the December exchange-traded contracts.  Some market participants may take physical delivery due to higher physical demand at this time of year (see below).
What sort of technical indications suggest higher prices ahead?  Let’s go through each of these below:

1. Open Interest

See the chart above - You will see the open interest getting smaller and smaller since the beginning of the year. What is open interest?  It is the total number of contracts on the exchange (1 contract=100 ounces of pure gold). Open interest measures the level of interest on any given commodity. When open interest increases and prices rise, this means more people are entering the market and driving prices higher.

2. Price Action

The next chart shows price action that is going down. Both prices and open interest have been going down. The volume (total number of contracts being traded for a period of time) has also been going down.

3. Putting it all together – falling volume, falling prices, and falling open interest - means that the market is running out of traders willing to keep the trend going. There is a high probability that the downtrend is coming to an end.

4. Commitment of Traders Report (COT Report). The Commitment of Traders (COT) report put out by the US government. This separates types of traders - categorized on the basis of ‘large speculators’ (like funds), ‘small speculators’ (like you and me), and ‘commercials’ (industry that may use the market for hedging or for business needs). This technical indicator is shown at the bottom of the second chart. Note that the category of ‘commercials’ (the blue line) has been going higher recently. All of these lines - the green, red, and blue lines - show net long position levels (net long means the total number of longs or "buys" minus the total number of shorts or "sells"). Note when the blue line goes to a relatively high level, the prices begin going higher - this is indicated by the circles in the chart. In general, the ‘commercials’ are usually right in their assessment of the market since they have lots of information and industry data and they take huge positions. What we see now from this indicator is a relatively high level (indicated by the larger circle on the bottom right of the chart) - this is a confirming indicator that prices are likely getting set to go higher...see the following link for an in depth introduction to this indicator.³

5. Seasonality. And finally seasonality – this time of year is generally a higher demand for gold and the precious metals globally – in India for the wedding season and globally for the holiday season of various festivals of lights and Christmas, etc…this seasonality is reflected in various seasonality charts – for example see below, courtesy of Zeal Intelligence⁴, showing November and December as a steep incline higher, and another seasonality chart below that courtesy of MRCI⁵, showing a similar pattern.

In summary: How high will gold prices go and when? This is difficult to say, considering global deleveraging. However, the indications considered here are that gold could be headed to higher levels over the coming weeks and months.

Is the coming rise in gold prices due to its decoupling with currency? Some would say gold prices simply measure currency going down in value…perhaps Alan Greenspan was thinking of this when in 1966, he stated that “under the gold standard, a free banking system stands as the protector of an economy's stability and balanced growth... The abandonment of the gold standard made it possible for the welfare statists to use the banking system as a means to an unlimited expansion of credit... In the absence of the gold standard, there is no way to protect savings from confiscation through inflation."⁶  

This is one case where Cliff Küle agrees with Alan Greenspan.  Unfortunately, this was the Alan Greenspan that existed before he was given power forbidden by the Founding Fathers in the Constitution of the United States of America. 

Resources:

¹ http://en.wikipedia.org/wiki/Warren_Buffett
² https://agmetalminer.com/2008/07/15/%e2%80%9cgold-is-money-and-nothing-else%e2%80%9d/
³ http://www.commitmentoftraders.com/
⁴ http://www.zealllc.com/intelligence.htm
⁵ http://www.mric.com
⁶ Alan Greenspan (1966), Alan Greenspan and the Gold Standard

© 2008 Cliff Küle
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