Hurdling More Barriers

2006-APR-16

Both gold and silver climbed higher this past week. Silver continues to outperform, with the consequence that their ratio fell further, dropping 4.9% for the week to 46.5, which is the lowest level in eight years.

Gold appears to be stuck at the $600 level. As we can see from the following chart, $600 is not a level that represents historical significance.

Gold hurdled over barriers 1-3, and barrier #4 waits above at $715. The $600 level represents what is often called 'psychological' resistance, which is the natural selling that occurs when a level in the hundreds is approached. Big, round numbers - like $600 - encourage profit taking.

It is also possible that central banks may have been 'circling the wagons' at the $600 level in an attempt to thwart gold's advance. Though they are clearly failing in their efforts to keep a lid on the gold price, they may be trying to slow - even if their market interventions can't stop - gold's relentless climb toward its old record high. Over the past couple of weeks the European central bank and various Eurosystem central banks have announced the dishoarding of 75 tonnes. How foolish, and hurtful to the taxpayers of those countries.

One would have thought that these bankers might have learned from 'Brown's Blunder', given the ridicule, and even downright anger, being increasingly directed toward British chancellor Gordon Brown for his decision to sell one-half of Britain's gold reserves at rock bottom prices. A growing number of British taxpayers are realizing that their best interests were not served by Mr. Brown's decision. Maybe the faceless bureaucrats in central banks making these new decisions to dishoard gold believe they will never need to face the public, as Mr. Brown must do.

In any case, 75 tonnes of dishoarding by central banks is a relatively large amount of gold, given that about 50 tonnes of gold is being mined each week. One wonders where gold would be now without this central bank intervention. This intervention no doubt explains much, if not all, of gold's underperformance relative to silver. But more importantly, as the above chart shows, the gold price has not broken down. Therefore, the market has absorbed this central bank intervention as well as any invisible central bank interventions not being disclosed.

So my expectation is that $600 will be hurdled before too long. The fundamental factors that are driving gold higher are just too compelling to ignore. Some of these are:

• There's a lot of inflation in the pipeline as a result of rapid money growth around the world (i.e., central bankers are creating currency out of thin air at breakneck speed). Now that the US has stopped reporting M3 to hide this monetary growth, will it force other countries to stop reporting M3 as well? How long will it be before organizations dominated by the US like the BIS and the IMF announce that M3 is no longer necessary and advise their member countries to stop reporting it?



• The US government is rapidly increasing its expenditures, worsening its deficits and growing the federal debt. As I noted in a recent commentary [http://www.kitco.com/commentary/old/Turk/turk_mar152006.htm no longer available] 'The federal government faces a potentially toxic mix of constrained revenue, soaring expenditures, ballooning debt and rising interest rates.' This toxic mix is dangerous and a lethal threat to the dollar. It is already eroding, and if not soon corrected, will destroy the purchasing power of the dollar.



• Protectionist measures in the US are growing, as evidenced by the Dubai Ports and Unocal fiascos. These examples make it clear that foreign holders of dollars are not being permitted to exchange these paper promises they hold for anything of real, tangible value like American ports or American oil companies. Now that US barriers to the free flow of capital are becoming increasingly obvious, the growing recognition that these barriers exist will hasten the rush out of dollars into international tangible assets that can still be bought with dollars, like gold, silver and other commodities.

When it comes to markets, there are of course no guarantees. As we all know, anything can happen, so no one knows the future. The purpose of these alerts therefore is not to predict the future. Rather, it is to share my thoughts about what I believe are glowing prospects for precious metals and a bleak outlook for the dollar on the idea that my point of view will be helpful as each of you decide how best to protect your wealth.