It has been interesting to read all of the views of the Precious Metals that have been offered up over the last weeks and months. I have read just about everything imaginable about Gold and Silver. I have read that Gold and Silver are going much lower, I have read writers who seem to be constantly whipsawed up and down on a weekly basis, and I have read that the Precious Metals stocks have lost their leverage to the price of Gold and Silver so one had better own only the metals. I guess that is what makes a market. I have also read that Oil is down and that is 'bad" for Gold and Silver, after I had read that higher oil prices were "bad" for Gold and Silver when the price of oil was rising.
On a daily basis we hear terms tossed about like "liquidity", "inflation", and "valuations"; but what exactly do those mean, and how are they important to Gold and to Silver? Conversely, how are Gold and Silver important to those terms, and how important is Gold and Silver to each of us in our daily lives? What are some of the fundamentals that might make Gold and Silver, and thus, investing in them and their derivative stocks of companies that mine both important to us at this time? We hear an Elliot Wave term, Wave III, tossed about like some magic note found in a bottle on the shoreline, but what might generate explosive Wave III phenomena to occur in the Gold and Silver markets at this time?
To find answers to all of these questions, one must revert back to the fundamentals of these markets, in my opinion. Simply put- everything lies in the fundamentals of markets. The fundamentals dictate the direction of price, then, the movement of price is modified further by the psychology of investors and traders as their perceptions of the fundamentals change. To be successful, one needs to identify what fundamentals are moving the price of markets early on, then one might benefit from those same fundamentals as other investors eventually begin to understand what the true fundamentals are. This concept is what creates opportunity in markets, in my opinion, and it operates in all time-frames…..on an hourly, a daily, a weekly, a monthly, and a yearly basis.
Once one has a decent grasp of the fundamentals that are moving price, then one might wish to use different types of technical analysis to further evaluate the health of price movement in comparison to the underlying fundamentals of a market. In many of our charts we use these technical indicators, along with some aspects of cycle work and "models" of historical price.
Though it would be impossible for us to consider all aspects of the fundamentals that are moving the price of the Gold and Silver sectors at this time, we'll sort through and consider a few that I find most interesting. My take is that the Precious Metals sector is going much higher, and soon. I expect to see much higher Precious Metals pricing into the first half of 2008 as I laid out, back in 2004. In fact, I still expect Gold and Silver to make a sold run, a "ride on a rail", if you will…..into the first half of 2008. In this run, I'd expect the Precious metals stocks to regain their leverage to Gold and to Silver~ exactly what we should have expected all along.
In the past, an economist named Kondratieff outlined the cycles of economic expansion over longer periods of time and organized them into "seasons." In his work he surmised that the end of an economic expansion would result in a deep period of deflation as things got overdone. Such a deflationary period would be marked by negatives such as excessive debt, weak economic strength, and too much leverage. This is the deflationary backdrop of today in the Western world. We see debt at all levels has grown to massive proportions as economic activity and employment have declined. The government is running ever-larger deficits which must eventually be paid for. For all intense purposes, such debt levels and deficits are what depressions are made of. Think about it….massive debt and massive deficits at the same time while the economy is weak. Take a look at the link, below, for instance.
Of course, governments know all of these things. In fact, a very long time, ago, Alan Greenspan wrote about how he wanted to be the Chairman of the Fed when this K-Winter came to town. He wrote about how he thought he could lower interest rates enough and could provide enough liquidity to the markets to stave off the massively deflationary K-Winter. And lo and behold, Mr. Greenspan became the Fed Chairman right about on time. In fact, as the Dow climbed into the stratosphere, Mr. Greenspan noted the "irrational exuberance" levels. Funny, but after making such statements he cut rates in the 1990's at times when the Dow had already moved up to new highs~ so what was he doing? Well, in retrospect it appears that the game plan to fight off K-Winter was already underway. It is a fight that has never before been tried in history. We saw the deflationary effects of K-Winter emerge, back in 1929, as the Dow dropped about 90% in price. This time it seems that the politicians had decided to do a real-time experiment on fighting the deflationary K-Winter.
So, how does one fight a battle with the deflationary K-Winter? Do you fight fire with fire, or do you try to neutralize the deflation with inflation, much like you neutralize an acid with a base? Well, all of this is speculation, of course, but I believe the only answer was to create a "cure" of massive inflation to neutralize the massive deflationary backdrop. Yet, a course of massive inflation would not be enough. Massive amounts of liquidity would need to be injected into the markets/ economy, along with setting up some type of program to help that liquidity to be rotated, around. This is very important since in an inflationary environment, all of the liquidity would naturally move toward the Precious Metals end of the spectrum. That would not suffice for many reasons.
After seeing the "rolling recessions" across the country in the late 80's, I suspect that such a strategy was planned for the economy- a plan meant to keep liquidity rolling- to keep segments of the economy liquid and above water. Such would be necessary to keep consumers active as they sucked up massive debt levels, an important aspect of what would be needed if a massive printing of dollars were to be absorbed by the system.
Thus, step one was to use the already formed stock market bubble to create an even larger stock market bubble. That might be why interest rates were lowered, though Alan had already cited "the irrational exuberance." Those rates were likely lowered to bloat the stock market bubble as the first domino in what was to become a "rolling bubble effect", to maintain liquidity levels to the public and to corporations. As the stock market bubble topped in 2000, rates were slowly lowered in small increments to provide relief to consumers, to slow the stock market drop, and to provide the impetus for the stock market bubble to roll over into the real estate bubble. A lot of value was lost as the stock market deflated, but now consumers could borrow more against their homes to reflate as the real estate bubble bloated higher.
So, why was it so necessary to create the rolling bubbles? Well, the cure to the deflationary backdrop of the K-Winter has to be massive inflation, along with the prevention of further deflation as bankruptcies started to pick up steam in the debt-laden economy. Rates could be slowly cut to near zero supporting the bubbled stock market to slowly deflate as liquidity was provided to the market by the plunge protection team. Those rate cuts would ignite the new real estate bubble, and the slow rate cuts would keep the real estate bubble forming for sometime. The bond market would rally with the slowly lowered rates allowing the corporations to sell debt- the most important aspect of keeping corporations alive. The real estate bubble would buoy the consumer who was deep in debt, and spur him on to use his higher valued housing to take on more debt. But most importantly, this would allow the government to print dollars like they were going out of style. For dollars to be printed, they can only make it into the economy if somebody takes out a loan in dollars. All of the above created the grease for borrowing to continue- to keep the "expansion" going against the grain of the deflationary K-Winter. There are other important aspects that include the buying of our bonds by foreign governments, but it all comes back to the ability to print dollars and increase dollar supply, called "Dollar Inflation."
Effectively, dollar inflation was the main part of the "cure" to the K-Winter deflation. Dollar inflation simply means an increase of the dollar supply as dollars are printed in large numbers. Part of it was the "carry trade" where investors borrow Yen in Japan at around 0% interest, then use the Yen to buy our Treasury Bonds- Treasury debt that means more dollar printing. Once the Fed elected to pull the zip-cord on the dollar by starting the dollar inflation, there was no changing strategies. From that point on, dollars must be printed in ever-accelerating numbers, either in paper form or as electronic dollars.
As an accelerating number of dollars are printed, the value of the USD drops due to the increased supply. As the value of the USD drops, the price of things purchased abroad such as oil increase in price since the dollar is worth less. This dollar printing inflation thus turns into price inflation. In the end, it is the generation of USD inflation, created to offset massive K-Winter deflation at the end of an economic cycle.
Since all Western Economies are closely tied, together, they are all in the same boat. Thus, they all suffer from large deficits at the same time, they all suffer from massive debt at the same point in the K-Winter Economic cycle, and they all are printing fiat paper currencies like mad for much the same reason. So, why is all of this important? Well, real things with real historical intrinsic value like Gold and Silver see their price in the falling paper currencies start to rise as the value of the paper currencies drop. Thus, Gold in USD rises, Gold in Japanese Yen rises, etc.. At some point the printing of paper currencies which results in their increasing loss of value causes investors to demand higher interest rates to borrow in a currency. This is seen as a "loss of trust in paper", as in paper currencies, bonds, stocks- everything that has no real intrinsic value like Gold and Silver. At that crucial point, the USD will be ready to accelerate its loss of value, and the government bonds will need higher interest rates to lure investors to buy them. Thus, the USD is ready to drop at an accelerated rate of value while government bonds threaten to drop in value as they require higher rates from investors. Things of real historical intrinsic value like Gold and Silver become the darlings of investment to retain the value of savings for investors. At some point, governments may have already felt the need to buy their own bonds with newly printed dollars, called monetization of debt. At that point, also, the prices of Gold and Silver start to escalate in the denomination of the falling currencies so that Wave III in the Gold and Silver charts is in full bloom as investors start to "discount" further drops in the paper currencies. And that, folks, is where I think we are right at this moment. Game over. Gold and Silver are ready to rise rapidly in relation to the falling paper currencies across the board.
In reality, once the Fed elected to pull the zip cord on the US Dollar, there was no turning back. They were left with only smoke and mirrors as far as the US Dollar level was concerned. They could trot Fed members out to "talk up" the dollar with strong dollar policy. It seems they have used every imaginable scheme under the sun to understate price inflation with the CPI numbers. They started raising rates in very small increments, but that is a laugher. Anybody who looks around at the rising prices seems to believe that the true level of inflation is closer to 10%. So, when is an interest rate hike really a "cut"? It is when you raise rates ¼ point, but inflation is rising at an even higher rate. Thus, real rates are still getting more negative. If rates that bonds are paying are below the rate of inflation, then there is no real reason to buy bonds just to lose money.
As we wrap up "Part 1" of "The Perfect Precious Metals Storm", I know there are a myriad of other considerations to consider. For instance, the ending of a long economic uptrend and the entering of K-Winter creates some real antagonism due to frustration on the parts of different governments. Such stress creates animosity and promotes fighting, but war is also a component that generates a positive effect on an economy, which makes one wonder. With the framing of the above, we can move on to charts in "Part 2", along with a discussion of how some of the above factors might affect, and effect, the charts in different ways, even to the point of potentially generating the movements in the chart of the HUI which I call, "The HUI Fractal."
For the moment…………..Goldrunner
Below, is the link to the Gold-Eagle Forum where many of us discuss the various topics of the Precious Metals sector………..
Again, I'd like to thank all of the posters at the Gold-Eagle Forum for their daily input. This thank you is especially extended to TQ and to Grininbarrett. Special thanks go to Dr. Vronsky and Westerman for creating the Gold-Eagle site and for editing my work. A very special "Congratulations" go out to Dr. Vronsky and Westerman after Gold-Eagle saw its hit counter ring up 256 million this last week.
Thanks also go out to CaptainHook and David Petch of TreasureChests since I have learned so much from them. They offer a wide diversity of fundamental and technical information and can be found at www.treasurechests.info/index.php
There are many great editorials that can be found on the Gold-Eagle site at the following link. Master David Petch from TreasureChests is one contributor……. www.gold-eagle.com/research/petchndx.html
February 12, 2007
Please understand that the above is just the opinion of a small fish in a large sea. None of the above is intended as investment advice, but merely an opinion of the potential of what might be. Simply put:
The above is a matter of opinion and is not intended as investment advice. Information and analysis above are derived from sources and utilizing methods believed reliable, but we cannot accept responsibility for any trading losses you may incur as a result of this analysis. Comments within the text should not be construed as specific recommendations to buy or sell securities. Individuals should consult with their broker and personal financial advisors before engaging in any trading activities. Do your own due diligence regarding personal investment decisions.