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Dig Deep for Gold, Gold Miners


Yellow metal set to rally big in 2009.

I thought I'd "touch base" with gold bulls. At the end of December, I was looking for a rally in nearly everything as the Fed's printing presses went into warp speed and created a bear-market rally in stocks.

However, given the inflationary nature of any potential rally in equities, gold should have rallied even more and thus pushed the SPX/gold ratio below 1, as I wrote here.

Let's go to the scoreboard and see how we did.

The S&Ps are actually down slightly on the month, but up from their lows. Meanwhile, gold has blown through the "monkey zone" on the chart like a bullet going through toilet paper and is up about 5% on the month. The fact that it has pierced this magic line on the chart should now trigger even more enthusiasm among those chart monkeys who hated the yellow metal passionately at $700 - but now can't wait to buy it at $920.

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As for the SPX/Gold ratio, it did in fact plunge below "1" last week as gold ($924) passed up the S&Ps (845) in price. The last time this happened was in 1973, and gold proceeded to nearly triple over the next 18 months.

Click to enlarge

Is history about to repeat? Probably not, but as is often the case, it will likely rhyme. Unlike 1973-1974, gold probably isn't going to rally due to an oil embargo, but it is going to rally for a very similar reason to why it began to rally back in the early 1970s in the first place, which was because the Bretton Woods monetary system in place since WWII collapsed when Nixon was forced to close the US gold window.

Similarly, while I still tend to believe that gold's rally is telling us something about the inevitability of more weakness in the dollar, there's no doubt that there is something else "gold-specific" going on as well, given its continued rise since mid-December in the face of a firmer dollar vs. the other major fiat currencies.

For example, we know gold is breaking out to new highs in all the major currencies except for the dollar and yen, and gold appears to be set to make new highs in these 2 currencies soon as well.

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What is gold's rally in all these currencies really saying, though? Some will tell you it's "fear", but that's never the case. When gold rallies, it does so for rational reasons, just like any other investment class that's been rising for 8 years straight. There are extremely large secular fundamentals driving the rally in the gold.
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Positions in NEM, GFI

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