In 1923, the renowned investor Jesse Livermore wrote an article in the Wall Street Journal called “The Square of the Numbers.” I will save the mathematics of his economic model for another essay but he used it to predict stock movements very successfully. What is of note regarding this economic model is that gold broke through a key technical area today when it rose above $1,764.00. Until today it was rising arithmetically. It had a nice angle of appreciation but not parabolic. I would characterize the rise as two steps up for every one step back. It behaved as a healthy stock should. According to Jesse Livermore’s economic model it has now gone from an arithmetic rise into a period of time where exponential rises are not only possible, they are probable.
$1764.00 signifies a loss of confidence. While in Livermore’s economic model the loss of confidence would be in the fundamentals of the stock or the management of the stock. However, in the case of gold the loss of confidence is in the depths and duration of the Western World’s economic problems. For gold to begin to move exponentially there has to be a mass change in the psychology of the entire world. The sentiment towards national currencies in the West has turned very negatively and has turned positively toward gold with the expectation that it will keep running.
One of the main drivers of this lack of sentiment is the total lack of management by Western governments. Situations arise and our leaders have no clue how to handle them. They simply just react to circumstances as they come. You, who read me on a regular basis, know that I do not like to use this post as a “bully pulpit” to espouse any political views I may have. In this case I will simply state the facts as I see them because like it or not politics has played a role in the situation we find ourselves in. The partisan bickering that took place during the debt ceiling compromise was an absolute embarrassment to the United States. It was painfully clear to the world that our elected officials reacted to the circumstances without any consideration for what the outcome might be. In the eyes of the world, anyone who had a part in that agreement should be embarrassed. The world now understands that our policy makers do not have the political will to do the right thing. They simply do not have the will to get back on the right road and stop the train wreck that will eventually happen if we continue down this course. This train wreck is the circumstances that are created by the decisions our leaders make reactively. The train wreck that I speak of is an out of control economy. An example of this is if you and I spent everything we had, borrowed on our credit cards to the max and lost our jobs on a national basis. Credit has gone wild and the chickens are finally coming home to roost.
What makes this even more troubling is that we are the world’s reserve currency. The currency that the worlds banks have taken comfort in is now officially broke. Our currency has a debt that is out of control. Sadly our currency has already spread this contagion throughout the Western World.
There is a story from the 1970’s when John Connally was President Nixon’s Secretary of the Treasury and we were having one of the many crises we had with regard to the dollar and Secretary Connally was quoted as saying to the leaders of the world “well the dollar is our currency but it is your problem.”
While this was madness then I don’t think this madness continues today. I think this madness has been brought into the light of day by the charade our Congress played in the increase of the debt ceiling. It was nothing more than theatrics for TV. I don’t think any economic event in modern history has been as embarrassing as the so called “compromise”, the so called bill and particularly the lauding of this accomplishment. What was particularly telling was the market’s reaction to it the next day as a total ruse.
Our problem is not simply the dollar or the euro or the euro on the dollar. That’s day trading. Our problem is in the entire Western world. Our problem is the fiat currency of the Western world. Our media has focused on the Euro and the rating agencies have now become totally Europhobic. What most people don’t realize is that if we turn the mirror around we would see exactly the same thing. The sad fact is that it is the Western world currency problem is endemic because the dollar has transmitted this debt contagion to the rest of the world. We have created this pseudo money in the form of digital bytes that is flying around the world.
So now that gold has broken the level of Jesse Livermore’s economic model and crossed $1764.00 it will begin moving exponentially in all currencies based on how that particular currency trades against others. Our only hope is that we adopt sound monetary policies. Sadly, I see that as folly. To do so would open a Pandora’s Box of this enormous amount of derivatives still floating around the world. This would expose a lack off balance sheet integrity in the U.S. banking system. When you are allowed to value your asset at anything you think its worth, how can that be balance sheet integrity?
So in conclusion, Right now I think we are on the cusp of what I believe is going to be a very difficult situation. I can’t conceive of how the balance sheets of international banks, which they have developed themselves through their ability to value assets at whatever they are pleased to value them at, can remain camouflaged with the contraction now in the business world.
I would urge all readers to study Jesse Livermore’s economic model “the Square of the Numbers” and move as quickly and as prudently as possible to either physical gold or solid Gold ETF’s like GLD, SGOL and PHYS. These are my favorites but feel free to find one that works best for you. This will be a slow moving train which will go on, in my opinion, until 2015. While I am long GLD, SGOL, PHYS, SLV, PSLV, AGQ and physical gold and silver I know that I would be remiss not to tell you that every gold chart has all indicators pointing to extremely over bought conditions. My charts all point to an imminent correction which would be healthy and expected. On the other hand Jesse Livermore’s economic model tells us that gold will now move exponentially. These are the facts. When to enter the trade is up to you.