Heads Up – Before Year-end, Rising Fear Will Send Gold Soaring

July 7, 2003 – Within the next several months, the price of gold will soar. This past January I projected gold to reach $900 in February 2004. Even though gold has climbed somewhat since then, the days continue to rapidly tick away, making that price target appear evermore distant within the months remaining until the projected date.

Nevertheless, I continue to believe that my $900 target is reasonable. The Fear Index is telling us so.

I calculate the Fear Index monthly, on the last day of the month. The Fear Index as of June 30^th is calculated as follows:

The Fear Index was 1.04% as the end of June 2003. That level is down from 1.10% the previous month-end and 1.13% reached in January, which is its recent high.

Each month-end value since 1967 is presented in the accompanying chart. We can see from this 35-year period the five buy signals given by the Fear Index. Each occurred when the Fear Index moved above its 21-month moving average, when this average itself was also climbing.

The fifth and most recent buy signal occurred in May 2002. Since then, as we can see from the chart, the Fear Index has continued to inch upward, and importantly, remains above its 21-month moving average, which also continues to climb. But here is the key point to my gold price projection, which relies upon some basic technical analysis.

Look closely on the chart to see the rising trendline formed in recent months. We can see from the chart that the Fear Index is above the rising trendline that began from its all-time low of .90% in November 2001. This fact is very bullish.

One of the basic dictums of technical analysis requires us to assume that a trend in motion will stay in motion. In other words, go with the trend until there are fundamental factors to suggest that the trend has reached its conclusion, such as would occur at levels of extreme over or under-valuation. Once those extremes are reached, it is an indication that the trend is about to reverse course because the extreme conditions then prevailing are a warning that the trend is unsustainable.

However, there are no fundamental factors suggesting that the level of fear in the economy or the money and banking system is subsiding. To the contrary, the level of fear is rising, and rightly so.

To name just a few of the more obvious reasons that are making people fearful for the future, we have: (1) the economy is weak and the long projected recovery is anemic at best, and at worst, in many industries and some parts of the country is non-existent, (2) the US is sinking into a Viet Nam-like quagmire in Iraq, (3) crude oil is back above $30 per barrel and looks ready to jump toward $40 per barrel as the promised Iraqi crude has failed to materialize, (4) the falling US dollar has resulted in little improvement for the US trade deficit, which has continued at record levels and will deteriorate further as crude oil prices rise, and (5) the federal government is spending money, incurring deficits and piling-up debt at record-setting levels. Add to these points an over-valued stock market and a possible derivative blow-up in Freddie Mac and Fannie Mae, it is understandable why fear is rising, and likely to rise further, which brings me back to the above chart and my projection for the gold price.

Rising fear means a rising gold price, as is clear from the Fear Index formula.Rising fear results from growing problems in the economy and/or the monetary and banking system.

The above chart suggests that we are headed for a train wreck, with the level of fear rising. Therefore, the economy and/or the monetary and banking system are about to go off the rails. We can project this to be the future result because two contending forces are moving relentlessly toward each other.

First, the Fear Index is climbing along its 20-month uptrend. Second, that uptrend is approaching the 23-year downtrend that began in the last days of the Carter administration, which was a time when fear was high because economic and monetary problems were widespread. Fearfulness about the economy and monetary and banking system has generally been falling since then, but when these two trendlines meet, we will have a train wreck. It will happen when the Fear Index breaks above its 23-year downtrend, and it will occur because of some major event negatively impacting the economy and/or the monetary and banking system. Whatever the event that causes the train wreck turns out to be, it will mean rising fear, which means a rising Fear Index, and that means a rising gold price.

So in the months immediately ahead expect some major event that will send the gold price soaring. That event will send the Fear Index above its 23-year downtrend line.

What will that event be? I don’t know. I could take a guess or two, but there is no usefulness in trying to figure out what the market already knows, which is the widening knowledge that is causing the Fear Index to continue climbing that 20-month uptrend line. It is more important to identify in which direction the trend is headed, rather than why it is headed that way.

The point is that the future event that will cause the train wreck is irrelevant to the important questions that you should be asking yourself today. Are you well prepared for a major financial catastrophe within the next several months? Do you own gold, either in hand or in allocated storage? [see Letter No. 325, “It’s Time to grab Your Gold“]

Rarely do the markets get set up for such a major event, namely, the breaking of a 23-year downtrend line. But it is about to happen soon, and probably before year-end. We are moving away from the major trend in which confidence is rising (i.e., fear is falling) to one in which the level of fear about the economy and the monetary and banking system is growing (i.e., people’s confidence is falling).

The breaking of any 23-year trend is a rare event, which generally results in profound and important consequences. It is therefore important to note that the last time the Fear Index broke above a multi-decade downtrend was in the early 1970’s, and we all know what happened to the monetary and banking system, the economy and the gold price after that.

In recent letters I have been drawing attention to the numerous parallels today with the early 1970’s in order to help explain the tremendous potential for gold in the years ahead. Well, rising fear is yet another similarity. And it is this rising fear that causes me to expect the gold price will more than double within the next several months. The train wreck coming to the economy and/or the monetary and banking system promises to be one of those milestone events that we will always remember.