SCHMIDT’S GOLD THOUGHTS (18 AUGUST 2009):
Given the currently low level of the VIX, optimism among paper asset investors has been converted to outright enthusiasm. The world has been saved, according to many of these enthusiasts, and now unlimited and happy growth awaits us. All that is required is patience, for economic growth will blossom and paper equities will again shine. That optimism exists in light of the historical evidence that no market that has been run up by a credit bubble avoids a long, painful, ongoing lateral correction that last years. Were the optimists correct in their beliefs, the Japanese stock market would be at a new high. A recent check confirms that not to be the case, almost twenty years after the peak.
Seems like the only other indicator heading south as fast as the VIX is the approval rating of the Obama Regime. Per the much respected Rasmusen polling organization on Sunday, the Presidential Approval Index was at -9%, a record low, and only about 47% give a thumbs up to the Obama Regime. With the fading and failing of that group comes financial risk. How does one save one’ s political prospects, and maintain the power to make policy? There in lies the problem, the risk, and the potential reward for Gold investors.
Our first chart this week looks at the growth rate of the U.S. money supply and $Gold. The line of red circles, using the right axis, is the cumulative growth rate for U.S. money supply, M-2 NSA, since August of last year. That date is chosen as it is when the Federal Reserve unloosed a torrent of liquidity to stem the financial collapse. Green line, using left axis, is the price of $Gold.
The rate of growth in the U.S. money supply rose dramatically from late Summer of last year through about March. That rapid increase in the money supply growth rate was like pushing the gas pedal to the floor. That burst of money supply growth pushed the price of $Gold up dramatically. A sudden increase of dollars relative to the supply of Gold pushed up the dollar value of Gold.
Then the growth of the U.S. money supply stalled, as indicated by the line moving laterally. The U.S. money supply ceased to grow. The U.S. money supply has not grown for several months. That failure of the supply of U.S. dollars to grow made dollars more valuable, on a relative basis. That failure of the U.S. money supply to grow capped the price of $Gold, as the chart portrays.
Our second chart, above, portrays $Gold and a short-term oscillator. As part of this broad topping process, the short term oscillator has given multiple Do Not Buy signals before each rally failed. Most recently it has given a second Do Not Buy in this most recent up move. Short term view would likely be that the final correction before the Fall rally may be in process.
We do note that should Monday’s sell off of $Gold persist, a buy signal on this indicator could develop. As can be observed in the chart, several short-term buy signals usually are required to find that final bottom in a correction. Those multiple short-term signals are necessary to generate the much more powerful intermediate term buy signals. We have been expecting another over sold low this Summer, and expect important buy signals to follow from that.
That all said, the longer term view is more positive for the price of $Gold as the U.S. economic policy situation is so bleak. Reason for that is politics. Obama Regime will take action in an attempt to bolster its collapsing political power. Second, Chairman Bernanke is in reelection mode as his appointment as Chairman is up for renewal in January. Together, these factors mean more U.S. government spending and the Federal Reserve monetizing the U.S. deficit created by that spending.
Slowing money supply growth in the U.S. translates into slower economic growth, regardless what the statistics for the last six months might suggest. Without aggressive monetization of the U.S. government deficit, U.S. money supply growth will continue stagnating. Slower money supply growth translates into lackluster U.S. economic growth which does not fit the political agenda of either the Obama Regime or Chairman Bernanke.
No government, and that includes the U.S., can make a money supply grow without direct monetization of the national debt. Federal Reserve policy is clearly headed in that direction. As money is fungible, whether the Federal Reserve buys U.S. Treasury debt directly or around about by buying other debt in the U.S. market makes no difference. Consequences are the same, and the discussion on the matter is trivial.
The Federal Reserve has no choice but to move toward direct financing of the Obama Deficit. The equivalent of cash delivery from the Federal Reserve to the Treasury is about to begin. The U.S. money supply will again grow as that is done. Owning Gold may be the only way to protect wealth from the political agenda of the Obama Regime and the Federal Reserve “printing” dollars without restraint in order fund that agenda.
GOLD THOUGHTS come from Ned W. Schmidt,CFA,CEBS as part of a joyous mission to save investors from the financial abyss of paper assets. He is publisher of The Value View Gold Report, monthly, and Trading Thoughts, weekly. To receive these reports, go to