Reading the Gold Tea Leaves - From the Markets and the Economy

I feel the next few weeks will be important in foretelling the economy for 2009 and maybe longer. Economic Cycle Research Institute’s (ECRI) Weekly Leading Index (WLI) has risen the last five weeks and the Dow rallied off its November 20, 2008, low of 7522.59 to 9034.69 on January 02, 2009. I always look at these two barometers, the Dow and ECRI’s WLI rising together as a good sign. However, it must happen over time, in a persistent and pervasive manner. Since reaching its most recent high on January 2nd, the Dow declined seven days in a row to 8174.65 on Wednesday January 14th. This was followed by a 12.35 point rise yesterday, taking the Dow up to 8212.49. After a seven day decline in the Dow one would expect a rally of some substance over the next few days and or weeks. If the Dow can sustain its self and ECRI’s WLI continues to gain momentum we might be witnessing the end of the recession. However, if ECRI’s WLI turns down and the Dow and the Transports turn down, I would take it as signal that the recession will be in full force. I include the Transports here because I have followed or studied Dow Theory thru Richard Russell-Dow Theory Letters since 1991. As of this writing, if the Dow were to break below its November 20. 2008 low of 7522.59 and the Transports break below its November 20, low of 2988.99, it would be a very bad omen!

Gold closed up $4.90 to close at $815.00 today. On January 09, 2009, Merrill Lynch’s reported that, “some of its richest clients are so alarmed by the state of the financial system and signs of political instability around the world that they are now insisting on the purchase of gold bars, shunning derivatives or "paper" proxies.” Merrill’s chief investment officer, Gary Dugan, went on to say that, “People are genuinely worried about what the world is going to look like in 2009. It is amazing how many clients want physical gold.” Merrill predicted that gold will soon rise above the all time-high of $1,030 an ounce, and gold would hit $1,150 by June of 2009.

According to the article from Telegraph.co.uk, referring to gold, “The metal should do well whatever happens. If deflation sets in and rocks the economic system it will serve as a safe-haven, but if massive monetary stimulus gains traction and sets off inflation once again it will also come into its own as a store of value. "It's win-win either way," said Mr Dugan”

Peter Schiff said recently on CNBC, that he believes gold will rise to $2000 an ounce in 2009. He had predicted that gold would reach $1000 an ounce in 2008 and of course it did. But this is short term thinking, much to short in my opinion for gold. I believe what is taking place in our country today is going to impact our dollar and gold for years to come.

I have written many times about the U.S. dollars World’s Reserve Currency status. For years I have written that the dollar would one day lose this powerful roll. It doesn’t take a rocket scientist to figure it out. Other countries have gone down this path; I called it the Yellow Brick Road, the Pyrite gold road to destruction, building up debt and deficits which are unsustainable. Very few people today realize that the British Pound/Sterling was the World’s Reserve currency up until around the end of 1945, when the dollar became the new king currency. Yes, the British went down the same Pyrite gold road that America is on today. You see this World’s Reserve currency status allows a country, which at this time is the United States to print money at will and trade it for goods that other countries produce by the sweat of their brow. Over the past few years we have seen countries threaten to move away from the dollar into the Euro or gold. Now it’s the biggest trading monster of them all, China, that is flexing its muscles. According to Chinadaily, “China's central bank said on Tuesday [January 13, 2008]it plans to implement a pilot program of settling overseas trade with the Chinese currency instead of the US dollar in 2009.”

“We’ll actively join international efforts to tackle the global financial crisis while safeguarding national interests,” said the PBOC.”

“It pledged to implement the pilot programs of settling foreign trade with Chinese currency, a State Council decision announced last month.”

As I have written before, it has only been 38 years since Nixon closed the gold window, this was essentially the last link to a gold back dollar system which freed the central banks to print money at will. Of course this is why the dollar buys over 80% less today than it did in 1971. This is call devaluation. Now, consider that the Fed and Treasury is currently embroiled in unprecedented actions, creating money at the most rapid pace in world history. One has to ask themselves, what will this do to the U.S. dollar over the next five, 10 or 20 years??? What will it do for gold in that time?

This is why I say, “It would be foolish to acquire gold for the short term but it would also be unwise not to own some gold for the long term!”

Craig P. Griffin

President, ITM Trading, Inc.


The report above was written shortly after close yesterday, January 15, 2009. Today at the close gold was up $25.90 to $842.10 and the Dow rose 68.73 to 8281.22. The Transports were actually down 24.95 to close at 3144.82. The divergence between the Dow and the Transportation Average is not necessarily a bad thing here. In fact a divergence between the Dow and the Transports can be a positive at times. What I didn’t want to see is ECRI’s Weekly Leading Index (WLI) turning down for the first time in six weeks. As I wrote above, if these two averages, the Dow and the Transports and ECRI’s WLI turn up in persistent, pronounced and Pervasive way the recession could be coming to an end but if they turn down in persistent, pronounced and pervasive way it might well be disastrous.