OIL
TO PREVAIL OVER GOLD
by Jim Willie CB
January 5, 2005
Home:
Golden Jackass website
Subscribe:
Hat Trick
Letter
Jim Willie CB is the editor of the “HAT TRICK LETTER”
For specific detailed analysis of the Gold, USDollar, Treasury bonds, and inter-market dynamics with the US Economy and Fed monetary policy, see instructions for subscription to my newsletter research reports, which include stock recommendations positioned to rise in the commodity bull market.
It is said widely that a picture is worth a thousand words. How about three pictures? These pictures are not crystal clear. They require the fine lens taken from the technical analysis workbench. A deeper discussion is included in the January issue of the Hat Trick Letter, which also features the controversial topic of how the queer version of US monetary expansion actually has yet to engineer the systemic price and wage inflation witnessed in the 1970 decade. The gold bull market has vivid missing links, which need to be recognized. An argument that fast rising money supply, easy terms for staggering new credit, widespread speculation, and central bank currency debauchery will therefore easily bring about a gold explosion makes for shallow economic analysis. Yet, such analysis prevails in the gold camps. China interrupts the Fed’s reflation rescue project founded in desperation!!!
The gold community must pay attention to the queer version of US monetary expansion, and how it actually gives a giant assist to secular deflation. The term “secular deflation” refers to a long-term cyclical phenomenon whereby bubbles burst, debt is defaulted, bankruptcies mushroom, jobs are lost, and misfortune becomes an economy. Many (including me) regard the 2000 stock bust as the beginning of such a dreadful period. The declining USDollar is the standard-bearer measure of a shrinking economy, as costs have risen. One might regard the damage to have been inflicted primarily upon the real economy, where things are built, not the financial sector, where assets are speculated upon in “sweat-free” work. The malinvestment of new money explains why gold is rising from the strong buoyancy of the falling USDollar, and from correlated price rises in metals (copper, platinum, steel) generally, but dragged down by the lack of pricing power, lack of finished product price inflation, absent strong job growth, and inadequate income growth. Seven steps are necessary to go from big money supply growth to a big rise in the gold price. The middle steps are missing.
ENERGY STOCKS WILL OUTPERFORM GOLD MINER STOCKS
In a new era of depleting oil reserves, troublesome oil patch labor, violent oil delivery systems, and declining USDollar, crude oil has risen far more than analysts in the mainstream community have expected. The gold community on the other hand, has trumpeted the notion that necessities will rise in price far more than discretionary items. So food and energy will grow more expensive, even as consumer electronics and clothing remain cheap and plentiful. In the chart below, showing the ratio of oil producer stock index to the unhedged gold miner stock index, a Head & Shoulders bullish pattern is evident to the trained eye. The neckline level of 2.9 has shown support with four touch points. The shoulder breakout level of 3.6 has shown resistance so far with six touch points. The head formed last year in autumn 2003 with an impulse low. Note how the 50-week moving average provided upside resistance around April 2003, now to provide downside support as it did around November 2004 recently. The stochastix indicator previews a little more softening and consolidation before the breakout in this ratio. A breakout looms highly likely in the next couple months. What it means is that oil producer stocks will outperform gold miner stocks. Both will do well, but energy stocks will do better.
ENERGY HAS BEGUN TO ECLIPSE GOLD
The year 2004 without doubt provided a constant litany of stories and justification for the tremendous energy bull market underway. If not for relatively mild weather in the summer, and now in the winter, energy prices would be even higher than currently are in force. Crude oil enjoyed a strong uptrend relative to gold all through 2004. It has begun to eclipse precious metals among commodity items. Now the ratio is finding support at the 0.093 level. The stochastix indicator shows a bullish crossover in progress as we speak.
GOLD HAS STRUGGLED
The gold community routinely puts blame on downdrafts to the gold price on ambushes from the gold cartel, and regular dumping by central banks. While those shadowy figures might indeed harm the gold price with assaults of paper gold in the futures pits and highly publicized physical dumps, little attention is given to other perhaps far more important forces. In a new era of total debt overload, failed reflation strategy, Asian drain of job income, and a tight ceiling on price structures due to Asian industrial imports into the US Economy, gold has risen, but not as much as most analysts expected in the gold community. Gold will someday surpass $1000 per ounce. Gold should have zoomed past $500 by now, given all the hoopla attached to easy money, ripe speculation, rising commodities, falling USDollar, and generally pervasive currency debauchery. So why has gold not risen much at all? In my view, its slow difficult ascent is due to the failed Federal Reserve reflation outcome. New money goes to unwise investments which aid the secular deflation underway. That is why. The gold community is negligent in understanding or reporting this phenomenon. They engage constantly in routine knee-jerk shallow analysis, which does NOT track the path of new money.
New money adds to the weight of American rooftops, not American living room fireplaces. A cave-in is more likely than effervescent activity from rejuvenating heat sources. New money adds to Asian factory output and jobs, not American. A revival in spending is underway in Asia, not in the real economy of the USA. The contrast between the real economy and the financial sector within the US Economy grows more stark by the month. In a nutshell, traction has not been achieved within the US Economy, even as staggering stimulus has taken root in Asia. In the previous stimulus cyclical marches in the 1980s and 1990s, jobs were created and wages rose, while prices bubbled higher and hefty price profit margins were realized. Asia now interrupts that process, yet the link to sluggish gold prices is not recognized. Look for gold to falter, and see its price fall to the 420 to 425 range. Its relationship with the USDollar and the cost-squeezed US Economy is explored more fully in the January HTL issue. New lows for the DXY index were NOT matched by higher gold prices recently. Get ready for a surprising USDollar bounce in coming weeks, supported by technical factors, NOT fundamental factors.
©
2005 Jim Willie, CB
Editorial
Archive
Jim
Willie CB is a statistical analyst in marketing research and retail
forecasting. He holds a Ph.D. in
Statistics. His career has
stretched over 23 years. He
aspires to thrive in the financial editor world, unencumbered by the
limitations of economic credentials.
Visit his free website to find articles from topflight authors at
www.GoldenJackass.com
