As see it, we have three factors that will dominate the coming months:

• The US Presidential Elections will need a positive backdrop. We can probably expect "political spin" that is upbeat. Something like "George Bush acted heroically. Iraq is now no longer a threat". This statement can be made regardless of whether the forces are withdrawn (in which case it will have been his brilliantly orchestrated "threat" of force that cowed the enemy) or whether there is an actual attack - which is unlikely to last for more than a few nanoseconds given that Blix has unearthed nothing, and the Iraqis therefore almost certainly have nothing to fight back with.



• The Investment Bankers who are short gold and silver and who have a desperate need to square their books will be predisposed to throw everything they have at the problem as soon as the war threat recedes. Unfortunately for them, their problems are not soluble, but the final fall-out might be postponed for a few months. I anticipate some possible downside volatility here - particularly in the gold shares.



• Regardless of "surface" appearances, there is likely to be insufficient substantive economic improvement which could drive the industrial equity market into a new Primary Bull Trend. However, if Iraq "goes away" and the oil price falls, we may have a sort of "Indian Summer" on the surface that will allow the markets to rise sharply and also allow the elections to proceed in a sort of "eye of the hurricane" type warmth and calmness. (Interviews with Mr Rupert Murdoch that have been "planted" in various publications have already paved the way for this line of thinking). There is also the possibility that corporations can show upbeat profits for no other reason that they wrote off more than they needed to in the past three years and can now start playing games again. Piercing the veil of BS, the key indicator of substance will be dividends - which are unlikely to rise.

By way of some evidence, here is a direct quote from a recent interview with Mr Rupert Murdoch:

"Mr Murdoch was unequivocal about war with Iraq. "We can't back down now. I think Bush is acting very morally, very correctly, and I think he is going to go on with it."

He said the price of oil would be one of the war's main benefits. "The greatest thing to come out of this for the world economy, if you could put it that way, would be $20 a barrel for oil. That's bigger than any tax cut in any country."

Mr Murdoch's comments come just a week after he told Fortune magazine in the US that war could fuel an economic boom.

"Who knows what the future holds? I have a pretty optimistic medium and long-term view but things are going to be pretty sticky until we get Iraq behind us. But once it's behind us, the whole world will benefit from cheaper oil which will be a bigger stimulus than anything else," he told Fortune. Mr Murdoch was unequivocal about war with Iraq."

http://media.guardian.co.uk/iraqandthemedia/story/0,12823,893762,00.html

The charts are showing signs which are consistent with my reasoning above.

The Dow Jones looks like it may want to reverse itself to the upside:

Note how the P&F chart has given a buy alert and how the RSI and MACD in the above chart seem to be wanting to rise from relatively oversold positions.

The $XAU has given a sell signal, which will probably inflict some severe pain on the speculators who had no business being in the market in the first place.

The oscillator on the Long Bond Yield chart seems to be showing a double bottom, and rising yields will be consistent with a "perception" that the economy may be about to start heating up.

Now, what does all this mean?

In three words: "Nothing of substance". In the grand scheme of things we are probably just going to see some temporary positive turbulence within a Primary Bear Market for industrial equities as can be seen from the following chart of the S&P - which shows a minimum downside target of 500 and a possible eventual downside target as low as 250.

Similarly, any downside turbulence in the gold price is likely to occur within the context of a Primary Bull Market in gold, which is firmly in place as can be seen from the following chart:

Clearly, $400/ounce is going to offer some strong resistance - which is ultimately why the gold share prices were recently under-performing the gold price - given that some of them have already factored in a gold price of $540 an ounce. Importantly, these same shares are likely to over-react on the downside in the near future. If you are a trader you may sweat a bit for a few months, but if you are a long term player you can sleep comfortably. The bottom formation on the gold chart took five years to evolve and will not "turn on a dime" - particularly given the outstanding short sale positions.

Conclusion

We live in a world full of cynicism and self-interest. It is politically expedient that the equity markets should rise to facilitate a benign environment for the US elections, and the Iraqi caper will conveniently provide this - regardless of whether or not there is an actual attack. Although the markets have been "worried" about WWIII, there was never any doubt that the Allies had any serious exposure. Time will tell, and I may be forced to eat my words; but I doubt it.

The Institutions will stuff a few gold and silver speculators as they take the opportunity to reduce their short exposures whilst the economic Indian Summer unfolds, but the coming months appear to offer a great opportunity to get out of Industrials at higher prices, and to get into precious metals at lower prices. (I have consistently been saying that I prefer Silver to Gold as "an investment", and nothing has happened to change this view. Gold is an insurance policy against systemic collapse, whilst Silver is a genuine investment. Both are "stores of value")

Unfortunately, because of the economy's rotten sub-structure (unsustainable debt burdens), the Indian Summer will very possibly make way for an economic winter consistent with the savagely cold weather now being experienced in the USA. Of course, the Iraqi caper has also given Alan Greenspan a convenient excuse to depart from the "party line", and he is now free to call Bush's proposed tax cuts what they really are - a load of old codswallop. Even if Bush gets this dumb idea through, whatever "savings" will be handed to the electorate by the Federal Government are more than likely to be taken away by the State Governments - most of which are bleeding. In any event, the "war" still has to be paid for - and you do this by raising taxes, not lowering them. The party is well and truly over and "magic pudding" economics won't work anymore.

So it may not actually be in George Bush's personal interests to win this upcoming election.

Which leads me to wonder: Who will the next "fall-guy" President be?

Brian Bloom
AUSTRALIA

February 18^th 2003