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Posted on April 23, 2007 -
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By John Reizner |


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In the last three and a half decades we have encountered both periods of relative stability in the gold price, but also periods of extreme volatility. When President Nixon took the United States off the gold standard in 1971, the result was a 9 year bull market in the price of the golden metal. There were two inflationary waves in the 1970's, the first peaking in 1974-5, and the second more severe wave peaking in the late 1970's and early 1980's. This period was also marked by escalating oil prices, driven by the actions of an Arabian cartel. Eventually, the gold price rose from its fixed price of $35 to its peak of almost $700 per ounce (London pm fix) in 1980.

We are now encountering, after 27 years of a gold bear market, a revival of both oil and gold prices similar to that of the 1970's. Gold is in the $600 plus range after years of languishing below $400 per ounce. Just as occurred in the 1970's, we have recently seen the gold market, oil and oil service shares increase tremendously in value. We are seeing some months of consumer price inflation beyond what I believe is a comfortable range. Farm land and food price inflation is with us as well. There has been a well-documented inflation in the price of commodities, which some have attributed to the extra demand from India and China. I think this latter point is a good thing in that it shows the expansion of capitalism or, in the case of China, communism with a capitalist face, which should increase world trade and act as a damper on some excess inflation.
 
On March 21, 2007 the Federal Reserve chose to leave interest rates unchanged and appeared to back away from future rate increases, while at the same time recognizing potentially inflationary pressures. Whether the Fed will reverse its trend since mid 2004 of raising rates and actually lower them shortly remains to be seen. It is entirely possible that we could experience inflationary pressures even if the economy slows down. The undesired effect of this event would likely be a return of inflationary expectations among the American citizenry, something that has not really happened for over two decades. That is not in the memory of many players in the markets, and thus could occur while not being fully recognized as such. I write about this sort of psychological condition in my article, Inflation and the Stock Market: Does Anyone Remember the Seventies?
 
It is interesting to consider from a technical point of view (though I am no chartist) just why the gold price started to accelerate after 2002. Gold is after all, a commodity, and the price of commodities can be known to turn on a dime. Sometimes it pays to keep this analysis on the simpler side. If one draws a simple trend line on a monthly gold chart across the top of the gold price in 1980 through the top in the mid 1990's, one would find that the gold price broke that downtrend line on the upside in 2002 when the gold price traded past approximately $300. As I was late to this market, I bought the physical metal myself four times: one time in the mid $300's, twice around $400, and once again in the mid $400's. I realized upon looking at this monthly chart, that we were talking about a longer term swing upward in the gold market. A breakout of this magnitude is much more significant than one on a daily or even a weekly chart. Well, enough about charts and technical analysis. In my opinion, the only time charts are readable in relative isolation is when one considers commodities.
 
The gold price is an indication of inflation in our economy. It has even trended upward at times even when our dollar has risen against other currencies. I believe the jury has rendered a verdict of "bull market."

 

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