Oh man, this is tough.

First, let me preface this by stating that I don't argue from any great conviction. What I'm doing is what I usually try to do when faced with conflicting views: argue the less popular side. That forces me to study that argument in detail, the better to get inside its proponents' heads and see things from their point of view. Having said that, let me make the argument one step at a time...

The technical picture:

OK, looking at a 1 yr chart of $GOLD, which gives a slightly clearer picture than GLD, I agree there's a definite upward bias based on an ascending triangle pattern. Not a tape I would fight in the short term, although we need a close above 825ish before I'm fully convinced. However, this short term pattern is superimposed on a much longer secondary trend line (ten year chart) which was recently broken. We're currently sitting just above that line at around 800, but the key point is we closed below it on a monthly basis. So, one has to admit the possibility that the secondary trend could be toast.

Now, the primary trend line which marks the beginning of this bull cycle back in early 2002 cuts right across the 550 mark at this point in time. Projecting forward, and taking into account that we've spent the last three years well above that line, you can argue for an intersection of the primary trend at 600 about a year from now, or at 650 in a couple of years, and STILL be in a bull market. That's one heck of a correction I admit, but is it any less convincing than the short term reading you've offered? Your case is good for a breakout, but there's a lot of resistance between here and 1000, and even if we get to 850 that still leaves us inside a fairly clear down channel on a 10 yr chart. OK, enough of that.

The fundamentals.

I'm not going to make a case for supply/demand where gold is concerned because, unlike corn, all the gold that isn't at the bottom of the sea is still out there waiting patiently for the right price, or more to the point, for a sharp rise in interest rates. What would drive that I don't know - I mention it simply as a variable that has to be considered.

What i'm more concerned with here is the inflation/deflation debate, which I'm sure most would agree is central to the gold story. In short, gold bulls are expecting some kind of hyperinflationary outcome resulting in destruction, or at least sharp devaluation of fiat currencies on a global basis, correct? Well, I would argue (and so would my wife) that we've already seen that. That's why gold is where it is today - we've had the inflationary period, in fact we ran right off the edge of it and can go no further. Why? Because the credit system is broken. More to the point, even if "repaired" as current emergency measures are attempting to do, where is the next borrower (assuming banks are willing to lend again) going to come from? Who is going to buy the next house/car/DVD player etc. that's going to turn this thing around in an environment of oversupply, overcapacity, and rising unemployment?

I just don't see it. What I see is us slowly descending into the abyss of falling demand in every category, except the basic necessities of life. Sure, those will be relatively more expensive if you're out of work or have blown your stash on loose women, horses or junior miners...<g>, but in absolute terms, prices should continue to fall for quite some time. How can they do otherwise with demand falling and capacity at all time highs?

Now, oil may be the fly in the ointment, but it could be some time before supply fails to meet shrinking demand. Already oil is being "hidden" on tankers lying at anchor, so peak oil aside (a problem for the future) I see no inflationary push there either. What I do see is Japan on a global scale - every central bankers worst nightmare - pushing on a global string. Now, where this ultimately leads is still an open question - it could dissipate harmlessly over time, or it could get really ugly, in which event you're back to the bull case for gold. But this could take years to unfold, which is the essense of my case: long term gold bull, but fighting an increasing deflationary headwind which will cap the price of everything, gold included, regardless of how much freshly printed "money" is sitting idle in treasuries (no one's dropped a rebate check on me lately...LOL!).

backwardation:

Not being in a position to make a case one way or the other, I refer to Mish Shedlock's response to Fekete's argument and will let the reader decide which of the two is the more compelling:

http://www.marketoracle.co.uk/Articl...

For my part, I find Shedlock's argument convincing, although I don't disparage Fekete by saying so. I've learned a lot from Fekete, and I'm not prepared to dismiss his argument entirely since I have no basis (pardon the pun) from which to do so. As with everything else I've had to deal with lately, I'm forced to stand on the shoulders of others and hope I can leap to safety before they sink into the swamp.

I'll just add one point to the debate that I haven't seen mentioned yet. We are coming up to year end on the tail (hopefully) of the largest crash in recent history, so there's a huge incentive to print a high close so that Q4 fund statements don't look as bad as they really are. Now, a rising tide lifts all boats (at least temporarily) gold stocks included. So, is gold leading, or following the stocks in this scenario? Just a thought. I don't know the answer, or even if the question makes sense.

Not very much makes sense to me these days actually <g>.

ebear