The Gold and Oil rally – a long term look
When you get right down to it, no matter what techniques one might rely on for his investment decisions there is one thing that they all have in common. In order to be successful an investor has to be on the right side of the longer term trends.
We are all bombarded with daily charts and sometimes weekly, but looking at the long term monthly charts can reveal areas where price on the long term has historically shown to be important turning or continuation points. Not only do they give you a perspective or where price has been in the past, it gives you an idea of where price is now in relation to where major peaks and bottoms occurred.
A great example of how a long term perspective can influence an investment or trading decision can be seen in the Corn chart below courtesy of Moore Research, Inc.
A quick look at the chart and we can see how the $4.00 area has been a major price turning point in the past. Over the past 38 years, $4 dollars (with the exception of 1996) had been uncharted territory.
Corn CBOT
I’ve used this example because it is relevant right now as Corn futures are knocking on the $4 dollar area. But now that we’ve seen a long term chart, we can see how significant this price area is to this commodity. On the inverse, we can see historically that buying Corn at/near/or under $2 dollars a bushel over the past 38 years was buying when price was cheap. Of course it’s not that easy buying 5000 bushels of corn and storing in your basement and trying to re-sell it a few years later. However, I am using corn for illustrative purposes and we will look at the Crude, Natural Gas, and Gold markets after this exercise. Having viewed the chart we can now see how the $4 dollar area is kind of like a pivot point going forward here. Either it’s still a long term price point where corn will turn down or it has the potential to become a floor for long term price. Armed with this knowledge one can at least formulate a decision making process for corn and better understand if the price fundamentals are about to change on a longer term basis.
Now we can also surmise the following after having viewed the monthly corn chart. First, either corn is at or near a potential major peak in price or the long term fundamentals of supply/demand are changing. And there’s a third possibility. The US Dollar’s weakness is affecting the price of corn. To elaborate on the third possibility, it seems that the commodity and financial markets has become a one way street. For the most part, the stock and commodity markets all rally together when the dollar is dropping in value and the opposite when the dollar is rallying. During the latter part of this decade adding currency fluctuation into the analysis is a must.
This history of paper money is littered with great dynasties that have come and gone. Even in the days of Rome, the beginning of the end could be seen in the amount of gold purity that was contained in their coins. Near the end I read somewhere that the gold coins had less than 10% gold and substitutes like bronze was used in the making of the coins.
Over the 20th century little by little the same thing has happened to the currency of the United States. From the confiscation of gold during the great depression, the Bretton Woods agreement to finally Richard Nixon’s removal of the US Dollar from gold, the US Dollar has become nothing more than a piece of paper backed by nothing. On that fateful night Nixon was heard afterward to say “Now……….we are all Keynesians.” About 36 months later the stock market bottomed at 577 and over the next 40 years, would rise to a high of 14,000, gold would move from 35 to 1000 and crude oil from $5 to $150. (At their respective peaks). And that brings us to the world we live in today.
The status of the American dollar from which the term “it’s as good as gold” comes from, has become a currency that has lost the credibility of the global world and while it is not being reported, a mass exodus is underway by the nations who are holding most of it. Its rejection will bring profound changes to the wealth and power that the United States once commanded. The pillars are being removed slowly and while no one has noticed that much, it will be obvious to all when the building finally comes crashing down.
Throughout this global debt crisis, each tool that has been wielded by the Federal Reserve has rendered no results. At first, we were assured that the situation would be remedied, but we have to ask ourselves, what can the Fed do? They have fired all of their bullets alrea