Golden Game

I have been watching the price of gold for two decades now, but I have to confess, dear reader, that this year wins the prize for gold price volatility. And it has just begun!

Since gold broke $400 an ounce in December 2003, trading has become what I can only describe as “agitated.” Some powerful moves up, followed by some powerful moves down.

As that famous detective of fiction, Sherlock Holmes would have said, “The game is afoot.” Most certainly afoot.

Remember that gold doesn’t really trade like any other commodity. Prices are driven ideologically and politically much more so than anything else I can think of.

How gold is priced has little to do with supply and demand. If gold is going up in price, there is also an inference that the U.S. dollar is going to go down, and that relationship works inversely as well. But there is more to it than simply dollar value.

Here at PROFIT CONFIDENTIAL, we are inclined to look at both sides of the equation.

With the quantity and quality (I hesitate to use that word) of the Federal Reserve Chief’s testimony before congress and the abundant economic reports (PPI, housing stats, consumer sentiment, employment, last quarter GDP numbers…), the battle has been well fueled with both a lot of bullish and some bearish information so far this year.

But don’t assume we have stopped a downward trend in the U.S. dollar. Whether investors drive it or Greenspan and Bernanke drive it, it makes little difference. The overall commodity market is also demonstrating fundamentally and technically that higher prices are in store. The U.S. deficit and debt position are growing at an alarming rate. They show no sign of reversing in the near term.

It is critical in an election year that those in charge and who wish to remain in charge make sure the electorate gets the message that all is okay. No worries. Calm seas ahead.

Central bankers are very, very savvy at understanding markets and the forces that drive them. Make no mistake, central bankers will do whatever it takes to achieve an “all is well” mindset in their citizens.

Paper money has been a very profitable construction of our government and those close to it. Gold is beyond its control. The Fed loses power when the people no longer wish to hold “paper,” be it currency or stock certificates, and shift to hard commodities like gold as a storehouse of value.

The government will squirm like a worm to get off that hook. Heck, it might even withhold information that is contrary to its supposed outlook.

The golden game is on, and it is getting nasty. Gold is still in a bull market. Don’t let short-term setbacks convince you otherwise.