Select Articles - Spread the Wealth

Spread the Wealth:
Protection Against the Storm

For over two thousand years, gold has been the ultimate safe haven in times of monetary corruption.

It is unfortunate for the common man that history is replete with these times of currency debasement / monetary corruption. It may be credibly argued − as in my novel Eye of the Pyramid − the Roman Empire fell as a result of a purposeful mismanagement of the monetary system. "When the true wealth was gone and only the paper remained, the empty shell was crushed with disdain." [p. 242]

When the United States was founded, our Forefathers warned us against this corruption. Perhaps Thomas Jefferson put it best when he said, "If the American people ever allow private banks to control the issue of currency, first by inflation, then by deflation, the banks and corporations that will grow up around them will deprive the people of all property until their children wake up homeless on the continent their fathers conquered." [p. 261]

During the American Civil War, Abraham Lincoln provided more insight on these issues. "The money powers prey upon the nation in times of peace and conspire against it in times of adversity. It is more despotic than a monarchy, more insolent than autocracy, and more selfish than bureaucracy. It denounces as public enemies, all who question its methods or throw light upon its crimes..." [p. 263]

In recent history, many argue that the NASDAQ melt up − leading to the crash in 2000' − was the result of irresponsible monetary policy. The subsequent housing inflation is thought of as a means to reinflate the economy − through the use of low interest rates and rising home prices, allowing billions of dollars to flow into the economy from refinance. The problem is... what happens when the burgeoning debt of the American consumer needs to be paid, not just postponed?

Thematically, through all of the aforementioned periods of monetary corruption − and many more not cited − gold has served as insurance for the common man. More than that, gold has served as the ultimate report card on the integrity and efficacy of central back policy. As such, it is not beyond the realm of reason to suspect that central banks are motivated to keep the price of gold low. According to Bill Murphy, president of the Gold Anti-Trust Action Committee, "A Gold Cartel, consisting of bullion banks and the US Government, have been artificially suppressing the gold price by many hundreds of dollars per ounce since the mid 1990's."

After the considerable introduction, it is time to move on to the technical thrust of this editorial. In the plot below, two primary sets of daily data are given: the HUI, and the Spread. The spot gold price has been removed, so as to better highlight the fundamental relationships being discussed. In addition to the primary data sets, the 50 day moving average (shown as a dark green line) and the linear trend line (the purple line) for the Spread are given.

Notice the first four blue arrows in the plot above, which track the broader trend performance of the 50 dma of the spread. The dashed purple arrow shows the expected performance based on this indicator. However, as shown by the final blue arrow, something happened during the time period − November of 2004 − highlighted by the purple circle.

What happened in November of 2004 that might be fundamentally new to the gold market, something which because it was new, could not be foreseen by the analysis of historical data? In this author's opinion, it was the introduction of the exchange traded fund, streetTracks Gold Shares (GLD), on the New York Stock Exchange.

Many were arguing about the relative merit of this financial construct during the time of its introduction last year. However, with the benefit of perfect hindsight, it appears that it was short-term dilutive to the gold shares − as measured by the performance of the HUI.

So what now? Well, if the free market eventually has the final word (as is usually the case historically), the solid purple arrows − which show a 5-year peak in the spread and its 50 day moving average − may be telling us that a major bottom has been put in for the gold shares and the price of gold.

In summation and according to the above technical analysis, we are in a period of uncertainty. However, if the spread corrects back to trend with two "down" blue arrows over the next 12 months, the price of gold should reach $550 with a corresponding HUI value of 350. So maybe, just maybe, it's time to Spread the Wealth.

Terry L. Krohn

August 25, 2005