Gold is Still Good

Uncertainty is spreading around the world. It’s not just the Occupy Wall Street crowd, or the European protestors who are frustrated, everyone is being affected in one way or another.

WE’RE ALL IN THIS TOGETHER

Rich, poor, business people, salaried employees, old, middle aged, young or unemployed… they’re all concerned about the changes happening before our eyes.

The elderly are receiving little, if any income. In many cases, their plans and hopes for a good retirement have been dashed. Plus, with the markets so volatile, they don’t know where to turn.

Middle aged working people are struggling too. Their incomes have gone nowhere for decades and concerns about job security and future retirement are becoming more worrisome. Essentially, they’re nervous, angry or depressed as a not-so-bright future seems to hang overhead.

The poor and unemployed wonder if they’ll ever get a job as their ranks grow by the most since records began over 50 years ago. And many young people are feeling the same.

DIM OUTLOOK

For young people, the situation is also very serious. With youth unemployment at levels last seen during the Great Depression, the consensus is that this young generation doesn’t have the same opportunities that the last several generations have had. So the older generation has been helping the young and it looks like that’ll be continuing.  In the past, it was usually the other way around.

It’s no wonder then that so many feel the system has failed them. And if they haven’t been directly affected, they worry they will be (see Chart 1, which shows the Misery Index at a 28 year high).  This coincides with a recent poll showing that 75% feel the U.S. is on the wrong track.

As we’ve often discussed, the world has indeed changed and many of the jobs that used to be available aren’t coming back, not only in the U.S. but throughout most of the Western world. They’ve moved to other countries where the wages are much lower.

Whether people understand this and all of the other fundamental factors that got the West into the situation it’s in, isn’t really the point. The point is, people are upset, they don’t like what’s happening and they’re taking action.

PROTESTING IS GLOBAL

This explains why the Occupy Wall Street and the “indignados” movement in Spain (where youth unemployment is almost 50%) gained momentum in such a short time.

From New York, to Oakland, to European capitals, to Sydney, protests have occurred in hundreds of cities all over the Western world.

The protestors blame the banks, Wall Street greed, the governments, war, the rich, capitalism, socialism and corruption.

Just what’s happened in Greece has been an eye opener. It’s brought the Eurozone and the world economy to the brink, a couple of times. And considering that Greece’s economy is only one seventh the size of Italy’s, the growing crisis there is evolving into a much larger danger for the global economy.

VOLATILE & MORE VOLATILE

This is making the markets even more volatile than they already were as uncertainty remains a constant. In fact, if you look strictly at the world’s fundamental picture, it’s currently not good.

Aside from what’s happening in the West, the Middle East remains uncertain too.

GO WITH THE FLOW...

With so many uncertainties hanging overhead, it’s best to just turn to the markets. Like we always say, they look ahead and they’ll tell us the story. The trick is trying to understand what they’re saying. And since they’ve been so volatile, it’s been more difficult.

In fact, it’s hard to remember a time that compares to the present one. The markets are still swinging wildly and simply reacting to the news of the day, which indicates nervousness. This reflects how people are feeling… nervous and uncertain with spurts of optimism… and that’s what nearly all of the markets are suggesting. 

The gold price has actually been telling us for the past few years that the world is a scary place, even more than it was during the 2008 meltdown.

The fact that gold has hardly declined in a normal downward correction (down only 16% so far) since then, after reaching record highs, reinforces that the world is tense and uncertain. Plus, with gold in other currency terms also rising to record highs, it further reinforces this (seeChart 2).

But you may remember that during the financial meltdown in 2008, all assets fell, including gold, and only the dollar and bonds held up.  This is something that could happen again. We might see an accident or a meltdown at any time, which would tie in with the much awaited full downward correction in gold.

Most telling during the 2008 crisis, however, was that gold fell much less than the other markets, and it ended the year on an up note.  It fell almost 30% during the year but ended up about 5%.

A RESILIENT BULL

Last time we showed you the current bull market in gold compared to other bubbles of the past. Gold is hardly near those explosive high levels, and the next chart provides yet another good example of this.

Chart 3 shows the gold price above, along with its leading indicator, below, since 1968.  Note the sharp steady rise in gold since 2001. It’s been an amazing rise, up 660%.

But the type of volatility gold had in the 1970s has yet to be seen. The indicator (lower chart) helps to identify volatility, as well as high and low areas in the major trend. Note the clear difference between the volatility in the 1970s and the movements since 2001.

So looking at the big picture… this indicator is saying that gold is near a normal high area within a major uptrend, but it has yet to experience any type of explosive action. This is likely still to come once this current period of weakness is over.