PART III

The Golden Bulls

1980 and 2007

1980

MORE ESCALATING CRUDE OIL PRICES

and the

End of Soft Money?

Since the end of the Gold Standard in 1973, low interest rates have been the rule, not the exception.  It all began in Nixon's second administration under Federal Reserve Chairman Arthur Burns, and accelerated when the Carter Administration appointed William Miller in 1978.

Low interest rates triggered renewed inflationary pressures in the last year of the Nixon/Ford Administration, accelerated in Carter's first year (1978), and blew out beginning in 1979.  Miller was discredited and replaced by Paul Volcker in August 1979.  But the damage to the dollar was already done, sinking to new lows against the German mark and the Japanese yen, our "euros" of the day.  In 1980 the Consumer Price Index (CPI) experienced its highest year to year increase (+13.5%) since 1947.

And crude oil?  In 1980 with no end in sight over the Iranian hostage crisis, crude oil prices also hit a new year to year average high, +57.7% (though prices did not peak until 1981).  We now had the perfect storm for a reactionary increase in gold bullion prices, the "safe haven" - a weak dollar, excessive inflation and turmoil in the Mid-East, the latter resulting in the highest crude oil prices ever, at least until now.

So with inflationary fears bordering on hysteria, what happened then?  You will see in the chart below, the speculators and the general investment public moved in with a vengeance.  Paul Volcker, Carter's new Federal Reserve Chairman, was busily shoring up interest rates (the increases helped create the erratic bullion pricing patterns during 1980 -  note the chart below), but the fact is, bullion pricing was way over any reasonable margins by year-end 1979 and totally unrealistic throughout 1980 and beyond.  For the second time since the US Public was allowed to buy and sell gold bullion on the open market legally, the bullion percentage increase popped over the CPI percentage increase.  This time by a whopping 92% in 1979 (December to December month-end moving averages), and +155% at its peak in 1980.  Even throwing in the highly volatile crude oil pricing into the inflationary mix, bullion at its February 1980 peak (again month-end three month moving averages), was 98% above the historical 112% "watch" margin.

A disaster never to be repeated, until now.

2007 

Another Perfect Storm

Another "Perfect Storm", except for the inflationary factors, at least for now.  Iraq, the primary source of our self-inflicted problems, appeared to be in less turmoil in 2007, but still with no political solutions.  The "low interest" housing bubble, another self-inflicted wound (albeit regulatory), has drastically exasperated the US economy, and significantly increased recessionary pressures.

But as we continue to call for even lower interest rates and even softer money, the unintentional consequence may very well be an even weaker dollar.  The Federal Reserve and others are busily debating the potential for inflation or "stagflation", as we experienced during the First Golden Bull. 

But the gold speculators are not to be outdone.  Already in December 2007 gold bullion was 27% over the CPI for the first time since 1987, twenty years ago.  Because of currently high crude oil prices, bullion prices did not test the 112% historical margin, the watch line for the CPI, and the crude oil inflationary mix.  But crude oil prices are highly volatile, and a little downward pressure will quickly make that bullion twenty-seven percent margin very relevant.

The Second Golden Bull may not be over yet, but as the market speculates, the unrealities will quickly set in.  From the tulip bubble in the 17th century to the housing bubble in the 21st century, we humans never seem to learn.  At least we are consistent.

THE Floating Bar CHART 

Since it is difficult to read the contents of the chart on eBay, the following is a brief explanation.

The "Black Bars" represent the percentage increase or decrease of 2007 price progressions on a three month moving average basis.  The little red bar represents the month-end close, while as the little yellow bar presents the low for the month.  The black in between the two represents the percentage spread between month-end and monthly close prices.  Occasionally the yellow bar (monthly low) will be above the red (month-end), representing a higher percentage increase (or less of a decrease) for the month, a technical bullish signal, if both are neutral or preferably on the upside.

The "White Bars" represent the same patterns for 1980, dark grey month-end, lighter grey for the monthly low.  You will note the erratic up and down patterns in 1980, probably the result of increasing interest rates, efforts made to reduce rampant inflation and strengthen the dollar.  And remember, by 1980 gold was grossly overvalued.  The professionals were probably selling, while as the general public was probably still buying. 

Apply the same process when you go back to look at Parts I and II.  If you look at late 1979 and early 1980, you will see some interesting similarities to the last four months of 2007.   

                                                              thmxs01/06/2008   

copyright2007-2008

AND NOW

PART IV

2008, The Year of Reckoning