Let's look at the Long Term

In this time of uncertainties, including for Gold, I went back to a graph of the Dow/Gold that I had found a year ago. At the time the ratio was at about 20 and it is now 16.

We can notice two things : one, we are still in this trend which has been validated several times; two, the ratio could very well break its support at any time, given the bell curve shape of this graph.

Or it could go back to 18.

I would opt for the former, for two reasons : the Dow is going nowhere even if it might rally in the short term and Gold still possess huge momentum.

It is especially striking when we look at the monthly chart below considering the fact that the month of December is not even finished.

I think it is possible that we might end the year on a new high for Gold, even if it's getting late and that no bad news seem on the horizon

Stagflation is it ?

Today, the term "Stagflation" is finally in the news after being discussed so many times in Gold Bugs' circles. Just because Greenspan has decided to use it yesterday in one of his speeches (one more... this is getting annoying).
I am really surprised that he is still receiving so much attention.

Apparently he hasn't been totally discredited yet.
But this guy might well be a contrarian indicator that might be worth considering. But what would it mean ?

In any case, this is not news, as I said. We have been discussing this for a long time.
Now we have to look forward and try to prepare for what's next.

One of my best sources

Zeall is becoming one of my best sources of analysis.
When I look back to last August, I observe that their timing of the gold market has been very good.

And I also like the way they use correlations to justify their investments.
In particular their observation of the correlation between Gold and Oil has been very influential for me.

And they have a large amount of archive that we can use, and they go back to 2000

Correlation seems the most scientific method and the most successful over the long run.
I still believe in Technical analysis but this is proving ever more difficult to get it right, especially for the short term.
Probably because Psychology gets in the way.

December update

This blog is turning into a monthly publication.
It was not my intent and I am going to try at least to make it a weekly event.

At the same time it is a way to reflect on a longer period and to avoid being caught up in the daily action that tends to confuse us.

So what's going on ?

Fed cut 25 bps on both fed rates and the discount window on dec 11th.
But Market was disappointed and plunged on that same day
Let's assume that it is because some hoped for 50 at least for the discount window (but you never know the exact cause. 2 weeks before 25bps was supposed to be a good news, but it was co anticipated, and a "surprise" 50 bps was so hoped for that here's a correction.

But next day, Fed announces new injection of liquidity along with the ECB and other Central Banks, to help avoid a Credit Crunch that tends to become a recurrent news, and the market "kind of" rallies.

Of course the Fed says his action had nothing to do with the market's reaction of the day before. Right ?

Gold followed the stock market during these two days. Fell on the 11th, rallied on the 12th.

But Gold is still a small footnote in all these events.

Sentiment in the stock market (and the economy at large) is all that counts in the US right now.
The establishment is doing all it can to avoid a panic that would have disastrous effects (think Wall Street 1929 or Japan 1988).

Of course inflation is much less severe in their mind, but they won't say so.
They continue to say that inflation is a continuing worry.

But you cannot fight both inflation and recession at the same time.
And when you choose not to choose you put the economy in an intractable situation.
It's called Stagflation. I remember that from my History classes.

For Gold it is going to be perfect until they decide to really raise interest rates in the face of a weak economy.

But we are very far from there now.