Major Trend Reversal in Fear Index Is Confirmed

We've been watching and waiting for several months now (see the September 1, 2003 alert), but it finally happened at the end of November. The Fear Index broke above its major downtrend line, which has confined it for more than twenty-three years.

I calculate the Fear Index each month, based on month end data. The formula is:

(US Gold Reserve) * (Gold's Market Price)
----------------------------------------- = Fear Index
                 M3

The Fear Index for November 2003 - based on the preliminary data reported for the gold reserve and M3 - is 1.18%.

(261.5 million ounces) * ($398.00 per ounce)
-------------------------------------------- = 1.18%
              $8,810 billion

The Fear Index has now reached its highest level since November 1999. But even more important is the breaking of its 23-year downtrend line, which is clearly seen on the above chart.

When the Fear Index is in a declining trend, confidence in the dollar and the banking system is rising. When confidence about the safety and security of money is rising, people tend to hold dollars in preference to gold. Since January 1980, confidence in the dollar and the banking system has been rising.

There have been episodes during this 23-year period when the Fear Index rose. For example, the index was sent higher by the Mexican debt default in 1982 and the savings & loan crisis that began with the bank holidays in Ohio and Maryland in 1985. But overall, the level of fear has declined, while confidence in the dollar and the banking system has generally risen. To prove this point, one only has to look at the share price of bank stocks today compared to their 1980 levels.

Conversely, when the Fear Index is in a rising trend, confidence is on the wane. In the current cycle, the Fear Index has been rising steadily since November 2001. Looking back over the past two years, we can clearly identify some of the reasons that are causing fear about the dollar and the banking system to rise - growing trade deficits, growing federal government budget deficits, rising commodity prices, warnings of a derivative explosion in the big banks, the dollar's downward spiral on the foreign exchange markets, etc.

These and other problems are becoming more apparent. Consequently, people today are becoming increasingly worried about the safety of their money, but so far, the number of worriers is small. So far, gold's rise has been led by goldbugs, momentum players, trend followers and other specialized groups for which gold offers some attraction.

But now that the Fear Index is climbing, the demand for gold will begin to broaden into the mainstream, like it did in the early 1970's when the dollar's problems and growing banking worries made gold an ever-popular alternative. The entire financial environment is changing.

As I said in my September 1st alert: "For the past 23 years, dollar financial assets have been outperforming gold. But when the downtrend line is broken, gold will be outperforming dollar financial assets. In other words, confidence in the monetary and banking system - after climbing for 23 years - is about to change. Conversely, after declining for 23 years because fear was falling - a result that made gold perceived to be less useful - gold will emerge as an asset of choice. People will increasingly move to the safety of gold."

Gold is about to become an increasingly popular asset, just as it was throughout the 1970's. History is about to repeat, and we can use my trustworthy and reliable Fear Index to guide us through the monetary problems ahead.

Published by GoldMoney
Copyright © 2003. All rights reserved.
Edited by James Turk

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