Gold – how long still before the Big Move?

The title of this week’s essay is of course contingent on the ability of the gold price to really take off and make a big move – something most people still doubt. In the US even letter writers who cover the gold price and the bullion market are said to be only about 40% bullish at these levels. Most of them believe that gold has gone has far as it could – for the moment at least, and perhaps for quite some time.

They seem to have been conditioned by gold’s behaviour over the past 6 years to expect all rallies to end and reverse back into the long term bull market – the one that has been lasting on and off since 1981. And that it now time for this one to do the same.

Well, I believe this time it is going to be different. Conditions in the US, despite various optimistic announcements and positive statistics and sentiments, are approaching major crisis proportions, mainly in the credit market and its derivatives. So far, the situation has remained largely placid at the surface, despite such facts as JP Morgan Chase and some other large banks being placed on negative watch by ratings agencies; this, because the money machine, after a minor hiccup in February-March, is back to full speed operation, pumping out liquidity to oil the straining wheels of the national credit operation.

Which means that the fuse of the credit time bomb remains only smouldering, not yet catching fully alight to blow the lid off the mess that has accumulated over the latter years of the past decade. When that happens, the panic will be such that investors who have some cash left will not know where to find a safe place to conserve what they have for the future – except for gold that is, the traditional safe haven of last resort.

If this sounds too much like the end of the financial world to be credible, one of the more highly regarded economists in the world believes that what lies ahead, in his words, “Come what may.”, is the worst financial disaster in history. Which obviously means the 1930’s Depression and what caused it.

The effect of similar developments today will be much worse than then. Firstly, the global economy is today much more industrialised and integrated, and thus the scale of a true financial disaster will be so much wider than before; secondly, in the 1930’s a majority of people still lived on or near the land and could feed themselves through their own efforts. While they may not have had a job and little or no money, at least they themselves could survive, without resort to the soup kitchens that were needed to keep many city dwellers from starvation..

This time around the majority of people live in the cities.

While this background, desperate as it may turn out to be, provides some justification for a claim that gold will move far and probably fast, it does not answer the question when gold will begin such a move.

Some observers of the gold market who have hazarded to define a final ‘break through’ level had 5-310 as the important benchmark. This has been penetrated on and off for some weeks now and gold has not yet taken off. Perhaps the key lies in the way gold has progressed until now – it moves up a few dollars and then stabilises there for a while. The signs are there that the battle for control of the gold price rages as before, but along the new battle lines.

As commented on last week, why should the buyers responsible for the firm and steady new demand lose their heads and bid the price higher or more each day? Is it not reasonable to expect that if their intention is to amass a large holding in gold that they should try and do so at the best possible price? Bids are competitive, that is evident from the rising trend over the past few months, but the buyers are behaving reasonably, taking the price just that little bit higher each time to shake out a new supply of gold from the entities who are tying to keep it under control.

Of course, this game can continue for another few weeks or even months. What would change the whole nature of the game would be a new crisis of confidence – confidence in the dollar, or in the US economy or even in some large players of the gold game, like the Goldman Sachs’ and the other bullion banks. If they get down-rated further or their debt comes deeper under suspicion, or the US gets embroiled in a new international crisis, that might just be enough to get gold started on what will be a Big Move. A really Big One.