Gold surged $9 on Thursday, with the dollar weakening on doubts about how well the U.S. will cope with soaring energy prices. Perhaps the newly emboldened dollar bears should be asking themselves what will happen if the U.S. is “unable” to cope? For one, you can kiss the economies of Europe, China and Japan good-bye, since the invincible U.S. consumer is all that separates these also-rans from the maw of destitution. For better or worse, they make stuff and we buy it on credit, and any disruption of that arrangement, no matter how minor, is likely to hurt our major trading partners at least as much as it will us.

I say “at least as much” because, come hell or high water – and the water has already arrived, literally – U.S. unemployment and output are ordained to appear healthy so long as the Commerce Department remains keeper of the stats. Europe on the other hand is starting with structural unemployment exceeding 10 percent; Japan, in a deflationary sinkhole that threatens to engulf Hades if consumers in the U.S. merely flinch. As for China, it has so much manufacturing capacity either working or in the pipeline that any downtick in exports would trigger a financial collapse and untold social upheaval at home, a deflationary spiral abroad.

Consider the Alternatives

Concerning the dollar, it has been strong – and will likely remain so – because the yen and euro are for reasons of liquidity the only alternatives. Keep in mind that it is interest-bearing debt instruments, not manufacturing and billable services, that have been attracting the lion’s share of the world’s investment capital in recent years. We know this is so because the total supply of financial products, estimated at more than $200 trillion, is more than five times the world’s $40 trillion GDP.  Who needs stodgy old manufacturing when investors can reap three times the returns from mortgage-backed securities? Goods and services are just a side show in the parking lot of the financial system’s global casino, and even Joe Six-pack, by entrusting his nest egg to a hedge fund, has become a financier. Hot money will continue to go where the action is, and the U.S. -- even reeling from a catastrophic hurricane -- still runs the hottest game in town.

What About Gold!?

Meanwhile, some of you are probably thinking, “Hey, what about gold!? Isn’t bullion an alternative to the dollar?” For sure. But with no yield, and no sign of financial panic, at least not yet, it will remain merely one alternative, not the alternative, for all that hot money. And although yesterday’s rally in  bullion may have felt exhilarating to the hard-money crowd, it must be viewed within the sobering perspective of the chart below. Far from breaking out, gold futures so far have merely blipped above the midway point of a range that has confined them for nearly nine months. For now, I’ll stick with my $470 target -- with a reasonable shot at $484.50, basis December, if it is breached. Profit-taking, not jubilation, will be in order when gold moves into that range.

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A Rick’s Pick Event

Hidden pivots will be the topic of my talk next Thursday, September 8, before the Denver Trading Group, the largest group of individual traders in the country. If you’d like to attend, further information can be obtained by  clicking here.  And here’s the publicity advance:

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