2008 Fundamental and Technical Review for Gold and Gold Stocks

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With gold already more than having tripled from its low of $250 in dollar terms, the fundamental driver for gold in 2008 will likely come from the flight from other fiat currencies besides the dollar.

The fundamentals for gold relates to the confidence level in paper currencies. When demand outstrips supply of dollars, the value of dollars goes up. The supply of dollars has been rising steadily at an average of 10% annually from less than $1 trillion in 1980 to over $12 trillion today. The fundamentals for gold thus have much to do with the lessening demand for dollars.

When dollar denominated assets lose value, people ditch dollars. As we have meticulously documented since August (see here), the subprime mess has been the dollarís worst disaster in the last three decades. The subprime meltdown is now causing supposedly high-quality government sponsored debts to be selling at 70 cents on the dollar (Mad Cow contagion as we call it). With the subprime mess as an extensively featured headline, and global central banks coming together to combat mortgage liquidity crises by printing their own currencies to support US mortgage debts prices (interestingly lead by the ECB, not the Fed!), the dollar crisis relative to other fiat currencies may have reached a climax. This means the fall of US dollar index may be suspended, at least temporarily...

With gold already more than having tripled from its low of $250 in dollar terms, the fundamental driver for gold in 2008 will likely come from the flight from other fiat currencies besides the dollar. This means that gold and the US dollar index may very well rise in tandem. Technically, the dollar index is rebounding and gold is on the verge of breaking out from the Euro, Canadian, and Australian dollars...

With the collapse of the US mortgage debt markets, goldís fundamentals have never been more bullish. The second bull phase will start as gold breaks out against all other fiat currencies. Comparatively gold has lagged other commodities this decade so far, but we believe that the factors driving such underperformance are reversing in goldís favor. Gold stocks have slumped as energy and labor costs outpaced goldís rise. Emotions and the sentiments pendulum have swung from one extreme to the other, but we expect such pessimism in gold stocks today to turn around to eventual euphoria in due time. Fundamentally and technically gold stocks are firmly in a long term uptrend, staying put in a bull market while some impatient gold bugs ditch their positions may just be the best prescription for the temporary winter blues.

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