Right now, there are more players aboard the gold bandwagon than passengers inside a rush-hour subway car. Doors open and out steps white collar to blue collar; advisors to academics; day traders to buy-and-holders; brokers, economists, barbers, and little old ladies with bags of broken jewelry for sale.
And, while this may sound a bit like a "crowded bubble," the mainstream experts assure us that today's gold rally has room for everyone. Why? Well, the way they see it, there are THREE main reasons why the metal's gains are here to stay:
- Reason #1: Threat of Inflation: "Worries of future inflation continue to be [part of] the winds behind gold's sails." (June 18, AP). AND -- "Fear Of Inflation Fuels Gold Price Rise" (June 21, USA Today)
Inflation is the mainstream financial media's greatest fiction. Fiction, because if it were true, then measures like the Consumer Price Index, the M3 money supply, U.S. residential and commercial property values, and price tags at Wal-Mart would be pointing up. Yet -- all of them are pointing DOWN, suggesting the opposite threat: deflation.
This insight comes from Elliott Wave International's president Robert Prechter, via his just-published, June Elliott Wave Theorist. In it Bob points out another important discrepancy in the "inflation now" scenario: the "fractured picture in the precious metals complex." Namely, while gold is making new highs, silver, palladium, and mining shares all made their highs TWO years ago.
- Reason #2: Bad Economy Hedge: "Gold Continues Record march after discouraging economic data from the United States kept investors on edge." (June 17, Forbes)
This leads to Wall Street's second misguided notion: That gold prices "protect in a downturn." But two years ago, the March 2008 Elliott Wave Theorist special study proved that since at least 1945, gold declines as the economy weakens and rallies when economy recovers -- "the opposite of what most gold proponents [say should] happen."
You can see a link to that important 2008 gold study on p. 3 of the June 2010 Theorist, where Bob Prechter also brings it up to date and shows how the synchronized relationship between gold prices and the economy has continued.
- Reason #3: Gold's current uptrend is stronger than the previous rally: "Prices advanced for four consecutive weeks and could remain in record territory on continued momentum." (June 21 AP)
Here, I'll let the June 18 Short Term Update do the talking via this close-up of gold prices versus the Disparity Index since July 2008.
As you can see, while gold prices have been hitting new highs, underlying momentum remains well below its 2009 peak.
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