What will it take to convince investors that Gold will do what Freddie Mac did, only in reverse...?
SOME PEOPLE get so caught up in short-term price action that they forget to look at the long-term picture, writes John Lee of GoldMau.com.
I have said it before: Gold goes up not because of inflation (defined as money supply growth), but because of a loss of confidence of in the paper money system.
This loss of confidence can occur for several reasons, from creeping up cost of living, rising commodity prices (aside from Gold), or feelings that the integrity of the money system is compromised.
I saw how people refused to acknowledge the demise of America's government-sponsored enterprises (GSEs) when it was written on the wall in 2007. Now they just can't ignore it.
For those holding Freddie Mac stock since Oct. 2007, their stupidity has cost them 95% of their money. It's gone from $65 per share to $2.60 today.
I believe the same thing is happening now regarding Gold, but in the opposite direction.
People are refusing to believe that the US Dollar has lost its status. Furthermore, they think the Euro is the new reserve currency and that Gold is expensive at $800.
All those beliefs will be turned upside-down in 2009. When lending giants like Fannie and Freddie go down, and the government has to guarantee trillions of dollars of their collateralized debts at par – debts which are currently selling at steep discounts – there will be moral hazards and financial turmoil to the extreme.
(I wrote extensively about this topic last November in Subprime Mortgages Lead to Subprime Currency...)
Technically, Gold ran ahead of itself in late 2007 as it raced from $650 to over $1000 in early 2008. This was panic buying from smart money that understood the problem with the dollar and the big GSEs. Gold now needs to climb above $850 to start the next wave.
When is it going to happen? It could be September this year or not until 2009. Either way, I have ceased trying to time the Gold Market.
The smart money investors have already positioned themselves in Gold. And when gold rises again over $850 and above the 200 DMA (red line), this will signal the start of the retail wave and it will be panic buying from the stupid money who buy gold because everyone else is. The way Freddie went down with a sudden rush could easily be the way gold goes up in a phase of manic buying.