Gold and Monetary Growth

Gold starts off the first full day of trading in 2009 with a resounding thud.  The DOW is down114 at 8,920, the NAS is down 21 at 1,605 and gold is down a crisp $23.70 to $851.70.  To some it may seem surprising that the dollar is moving sharply higher, but considering the ever expanding global economic slowdown it is not that unusual.

The dollar has always been a safe haven in troubled times.  Most people alive today have never known it to be anything else, so it is only natural that they would turn to the dollar during tough times.  Situations and times change however and we are on the brink of a sea change in the perception of  both the dollar and the reality of what is truly a safe haven in these times.

Gold will react to the global financial crisis and slowly evolve into what it really is:  The true flight to safety currency.

Moming Zhou of MarketWatch posted this out of New York earlier this morning.

Gold for February delivery was last down $32.50, or 3.7%, at $847 an ounce on the Comex division of the New York Mercantile Exchange. It dropped as far as $843.50 earlier, the lowest since Dec. 25.

The dollar rose against its major rivals to start the first full trading week of 2009, with the dollar index (DXY at 82.82, +1.03, +1.3%) up 0.5%. The greenback and gold prices tend to move in opposite directions.

“Gold headed lower as the dollar surged,” said analysts at Action Economics. Also, “gold prices will remain sensitive to movement in oil.”

The greenback rose despite “the lack of an obvious trigger,” said Marc Chandler, a currency strategist at Brown Brothers Harriman. The magnitude of the gain was unexpected, he added.

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The dollar’s upward trend, however, could lose steam depending on Federal Reserve monetary policy, analysts said. The Fed has already lowered benchmark rate to a range between 0.5% to zero percent.

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The effect of President-Elect Obama’s $675 to $1Trillion proposed economic stimulus package, along with the Fed’s stated intent to do everything in it’s power to revive the US economy, was all the push that the dollar needed to start rolling up hill overnight and into this morning’s session.  The dollar’s rise sent both oil and gold heading down. Not to be ignored, the euro hit a three-week low against the dollar based on the perception that the ECB is lagging behind the curve in lowering interest rates.

These kinds of moves are to be expected until gold finally disconnects itself from the dollar and oil.  It appears that perception is everything at this point in time.  “I am scared of the market, so I will sit it out in the dollar, thus avoiding any losses”.  “I think it is true, therefore it must be true.”  Well soon that will no longer work because the dollar is being devalued at an incredible rate, only most don’t realize it yet.  Look at the increase in US money supply over just the last six months.

Now let’s step back and look at the rise in the money supply from 1960 through 2008.  This is unprecedented and we will feel the consequences of this  for years to come.

This is an iceberg looming on the horizon and it seems that the economic ship does not have enough time to change course before the inevitable collision.  I have mentioned the willingness of the government to do anything within it’s power to maintain the system in previous articles, but it bears repeating here.  Any opportunity that arises that will enable the government to knock gold down will be taken.  It is imperative that confidence is maintained in the dollar.

When the public loses confidence in the currency things could spiral out of control and control is one thing that all governments do not give up easily.  Hyper-inflation is a possibility as is a gold backed currency at some point.  Whatever it takes will be done to keep the ship afloat.  Unfortunately the public is the one that suffers through these type of economic transitions.  Be prepared for the changing economic future, BUY GOLD!

Types of Traders

I want to take a few moments to comment on trading in this type of market.  Today’s move in gold is an example of how quickly sentiment can change. First let’s define two types of traders.  Long term traders need not be concerned by day to day moves in the price of gold.  Their concerns are by nature long term and they need to be more concerned with long term trends rather than daily fluctuations.

Active traders are trying to achieve a completely different goal.  They should be watching trading ranges because they move in and out of stocks based on the stocks position in the range, taking profits as they move to the top of the range and buying stocks as they move toward the bottom of the range.

All traders should have a predetermined sell point on both the upside and the downside of trades that they enter into.  I like to use 10% on the downside and 25% to 30% on the upside.  I will admit that it is hard to sell a stock that is on the upswing, but if you keep your stop trailing 10% behind the move you can still follow the move for a long time.  If you get nervous, you can always trim your trailing stop to 5% as the run gets longer.

If you had a 10% trailing stop on your gold positions in July 08 and decided to buy back in Nov.08 you would have increased your positions by over 1/3.  Not bad for 4 months.  It is better to be safe than sorry! As we move forward in this market I will adjust these percentages as the swings become more violent so as not to be stopped out of positions that I want to keep.

Till next time, good luck and good trading!

More Gold Market Analysis:

• Perception Is Everything
• Gold’s Next Move
• Buy Gold Now
• Inflation and the Price of Gold
• Gold and the $345 Myth