Several weeks ago, heading into the Fed’s latest QE announcement, gold looked ready to rally.  However, rather than the resumption of its secular bull market, the rally seemed more a response to how oversold it had gotten and how loud the currency debasing drumbeat would grow, following QE.  The chart below suggested both the aforementioned oversold-ness and the indication that any resulting upside would quickly prove divergent.

Gold Monthly Spot Price

The next chart – gold’s primary trend – telescopes in on that prospective divergence, as well as the formidable resistance at gold 1800 that had thwarted two earlier rallies.  If the indicator doesn’t yet seem certain to roll back down, as price tests 1800, odds are that it will soon.  A breakout above 1800 would force a review.

Gold Weekly Spot Price

Having been bullish on gold since at least 2001, I offer the next chart for perspective.  It shows gold’s secular bull market pattern, as of July 2008.  Absent any hint of divergence – contrary to the look today – it seemed the picture of technical health.

Gold Monthly Spot Price July 2008

However, gold’s primary trend in July 2008 projected the same kind of divergent pattern the secular picture suggests today.  The indicator was oversold then, too, having already corrected 15% since March.  But recession evidence became overwhelming and the money-printing response became widely anticipated, so gold rallied.  Sound familiar?  Still, the gold rally threatened a double top then – just like it does now – and a potentially divergent one at that.  Again, sound familiar?

Gold Weekly Spot Price July 2008

Below is that July 2008 chart, advanced one month.  The rally had ended, the divergence matured, and gold’s price had already fallen 20% – in one month – on its way to a 38% sell-off, all within the context of a still bullish secular pattern.  The difference now, again, is that it is the secular bull pattern that projects a divergence.

Gold Weekly Spot Price August 2008 – One Month Later

Meanwhile, the inversely correlated, secularly bearish dollar turned strongly higher in 4/11.  And even as it corrected in 2012, as recovery prospects dimmed and dollar-bashing intensified, it contained the sell-off and firmed its indicators.

USD Monthly

So, what explains why gold looks at least secularly challenged and the beleaguered dollar pattern might be considered bullish, at least on an intermediate-term basis?  And why hasn’t inflation – the requisite trigger for gold to fulfill any of the consensus $2000 or $3000 forecasts – already reared its ugly head in response to the unprecedented currency debasing the Fed has engineered these past four years?

I believe, as I have for years, that the answer lies in the two primary facets of the global debt problem.  First, it is mammoth, and, second, the vast majority of it is denominated in – you guessed it – U.S. dollars.  As global recovery prospects dim, doesn’t it follow that the collateral underlying all that dollar-denominated debt would likely suffer devaluation and default?  In fact, both JPM and WFC reiterated their respective still high loan portfolio write-offs in their quarterly bank earnings announcements last week.

The issue is that debt collateral devaluation removes dollars from the economy.  And with our level of debt, to say nothing of the dollar-denominated debt held overseas, markdowns would be, as we all know they already have been, of such a size that prolific money-printing is necessary to merely offset what dollars have been lost to devaluation.  If recession prospects intensify and spread, the devaluation of collateral will also.  Inflation would be then exposed as a Fed objective, not a managed upside target.  As a corollary, gold price would lose its source of fuel.  Worse, investors broadly based bullish expectations for gold themselves would become subject to devaluation.

Clearly, the long-term chart of gold is not yet 100% convincing.  But it is suggestive.  And, clearly, it is far more suggestive of the bearish case than it was in July 2008.

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