Gold closed at $897.90, up $41.10. The dollar closed up 0.03 to close at 85.52. The Dow closed at 8077.56, down 45.24 and the Transports closed at 2965.89, down 66.71.
Ex-Fed Chairman, Paul Volcker was introducing Tim Geithner at the Senate Confirmation Hearing of Tim Geithner for Treasury Secretary. Of Course Geithner was the Former President of the Federal Reserve Bank of New York. I think what Volcker said was the story. Again, Volcker was the Federal Reserve Board Chairman from August 1979 thru August 1987. The Wikipedia had this to say about Volcker, “Volcker’s Fed is widely credited with ending the United States’ stagflation crisis of the 1970s. Inflation, which peaked at 13.5% in 1981, was successfully lowered to 3.2% by 1983.”

Again, I am more interested in what Voclker said, than I am Geithner’s appointment. Volcker said, “You know a good many years have past since I last appeared before this committee, but during all of that time, there’s never been a more critical time for the American economy and particularly for financial stability. That’s true just not in the United States but globally. To put it starkly, we are in a serious recession with no end clearly in sight. The financial system is broken. It is a serious obstacle to recovery. There is no escape from the imperative need for the Federal government to come to the rescue, to right the economic and financial ship. Over time the hard fact is that several trillions of dollars will be necessary to be committed in a combination of budgetary expenditures and various guarantee insurance programs and extensions of credit by the Federal Reserve. Obviously, commitments made of that magnitude raise very large questions. They are not only questions about avoiding waste of the tax payer’s money, important as that is. There are also risks of undermining confidence in the dollar and raising fears of future inflation, they need to be recognized.”

That was Volcker; let me tell you what I believe. I believe gold is going to discount (look into) future inflation, in other words the markets always look ahead, this is the big money and it always moves first. When it does, gold will be off to the races, BIG TIME! I also believe that the speculators will begin to turn to gold as they turned to the NASDAQ and internet stocks during the bubble and as they did with housing and oil. In essence, what Volcker is saying and you have heard it for months now, is that the Fed and the Treasury are responding in unprecedented ways to stave off another Great Depression. Trillions are beginning injected into the financial system and the economy. Banks are being nationalized, our major car makers are being bailed out and the Banks appear to be in more trouble than they were a few months ago at the height of the crisis. This means banks are going to need even greater injections of money. There are also currency concerns all over the globe. This I believe will be good for gold!

In a global recession, oil is not going to be the place that speculators turn. Oil is very vulnerable during recession or the beginning of an expansion. Housing is in this same boat. It will be gold that everyone is going to turn to and just as this economic crisis came faster and harder than even I thought it would, the next boom and I mean the boom for gold, could as well! You know that old saying, “there is no fever, like gold fever! That doesn’t mean I think anyone should buy gold for the short term, anything can happen short term and often does. Gold rose today in the face of a slightly higher dollar. The dollar has been in an up trend since hitting a historic low of 71.79, on July 15, 2008. Gold has been holding its own during this period. This has happened before. Gold rose off its intermediate bottom of $412.10 on February 8, 2005. From there gold and the dollar rose together until the dollar gave up the ghost on November 16, 2005. (See the attached chart below). But don’t think that the dollar is going to be strong long term, its not! It can’t and that is what Volcker is saying here, “There are also risks of undermining confidence in the dollar and raising fears of future inflation, they need to be recognized.”

Last week I wrote that, “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.” Well that theory is going to be tested because the Transports broke below its November 20, low of 2988.99, on Monday, January 19, 2008, closing at 2959.40, down 188.20. The Dow also closed down big, losing 332.13 points to close at 7949.09. But the November 20, 2008, low for the Dow is 7522.59, so the Dow failed to confirm Transports on the down side, by 426 points. Why is that important? Because according to Dow Theory, if one of these two averages breaks it previous low (which both hit on November 20), and the other one does not confirm and both averages move up and break their most recent high, a new bull market is confirmed. So if the Dow and the Transports break those highs, 9015.10 for the Dow and 3717.26 for the Transports a new bull market will be in force. But if the Dow now breaks below 7522.09, it is a very bad omen and the stock market will probably go much lower. How low? I believe the Dow will break down to around 5000 points. Bob Prechter, Elliott Wave Theory, wrote recently that he believes the Dow will drop below 400 (four hundred) points.

As I suspected, Economic Cycle Research Institute’s (ECRI), Weekly Leading Index (WLI), sank for the second week in a row. This not a good sign and if I had to guess at this time, I would guess that that Dow will violate 7522.09. But two weeks is not a major reversal, so let’s wait and see what happens.

And remember, “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
ITM Trading, Inc.