Gold? Yellow, glittering, precious gold?
This yellow slave
Will knit and break religions, bless th’ accursed,
Make the hoar leprosy adored, place thieves,
And give them title, knee and approbation
With senators on the bench.
— William Shakespeare, Timon of Athens
Gold, if not impractical, remains highly mysterious when placed in juxtaposition with other objects that enthrall the human psyche. It is widely assumed gold acts as a hedge against inflation — and while functionally this may be true under certain circumstances, the long-term correlation of CPI and gold price does not do adequate justice to this assumption. Thus, the promotion of this viewpoint denotes a fundamental misunderstanding of the yellow slave.
Paradoxically, gold is both a slave to the individual, and as expressed by Percy Bysshe Shelley, a “living God” that commands mankind; it is subject to our immediate will, but binds our actions and aspirations by demanding proper treatment. Where undervalued, it flees; where held in high esteem, it works to endow both wealth and political power.
Gold, in this respect, is representative of the value mankind places upon his freedom. It is the antithesis to the chains of circumstance and commerce that bind mankind, and ensures his freedom by being held in close proximity. It is thus natural to envision gold as an antithesis to debt, whose functional role is to bind our economic freedom, and if not appropriately restrained, binds our personal freedom as well.
To garner an appropriate understanding of the gold market, it is therefore expedient to price it as a function of its economic antithesis – long term debt – whose rate of growth reflects a fleeting understanding or ignorance that freedom is being encroached upon. Without an understanding of both the growth rate of long term debt and its cyclical price gyrations, no accurate long-term forecast can be set forth.
Exhuming the weekly long bond chart, a very significant channel support level (115) is about to be both tested and broken on the downside. Holding in consideration that 2011 is an important year predicated upon previously crisis cycles, many analysts will be left without an explanation for why the rally entered a higher order trajectory. When a long-term cyclical low in public confidence comes into phase with a regularly distributed crisis function, the function defining the behavior of gold enters a higher-order state, unbeknownst to those unacquainted with history.
The chart included was originally constructed to reflect the various possible modes for the gold price, with a number of its key components defined externally by a cyclical model. It is meant as a primer to demonstrate that higher-order functions are constructed on the basis of previous movements in price, and with an understanding of enveloping cycles may be accurately predicted.