Goldrunner - But I Won't Do That

"I'd Do Anything For Love (But I Won't Do That)"

And I would do anything for love, I'd run into hell and back,
I would do anything for love, I'll never lie to you and that's a fact.

But, I'll never forget the way you feel, right now, oh no, no way;
And I would do anything for love, oh I would do anything for love,
I would do anything for love, but I won't do that, ah, no I won't do that.

……..Meatloaf

As I return to discussing the Precious Metals markets after a long vacation, and I look across the landscape, I guess this song by Meatloaf comes to mind. After Meatloaf caught the attention of the public with his very emotional song, "Paradise By The Dashboard Light" which included "the baseball game" where two young lovers roll through the whipsaws of emotional highs and lows that might seem so familiar to so many- he later came out with this song. I suspect that this song might have been a very fitting result of the rollercoaster ride of emotions expressed in "Paradise By The Dashboard Light." But, just what is it that he won't do? My guess is that he is saying that he won't extend his emotions to risk. True love is probably the most unselfish thing that one can ever give in terms of commitment, but commitment involves giving yourself up- to "risk you", me thinks.

Everywhere I look I see the same question posed, over and over. Gold and Silver have broken out to historical highs, but when will the Precious Metals stocks especially the explorers and the small caps make a run to the upside? Maybe Meatloaf's two songs and Punxsutawney Phil who sometimes sees his shadow have more in common with the Precious Metals stocks than some might think, but before we get into that intrigue, let's run through the fundamentals of the Precious Metals markets as I see them. I know it gets a bit boring looking at the underlying fundamentals, but that needs to be the starting point at each juncture. IMO, when it comes to investing one needs to constantly ask himself, "What has changed, if anything?"

When we look at the fundamentals of the Precious Metals sector we need look no further than to Gold and Silver. The main fundamentals drivers of Gold and of Silver are simply supply and demand. The supply of Gold and Silver is fairly limited or finite on a relative basis, but demand can change dramatically. This is especially true since Gold and Silver are seen more like a commodity during "normal times" for manufacturing demand as seen in dentistry or in the of making jewelry, but at key times in history Gold demand escalates as Gold and Silver are seen as Real Money during times of economic upheaval when investors turn to Real Money Gold and Silver to protect the value of their savings. As Gold and Silver demand escalates at the inflection point where individuals start to flee to Gold and Silver to preserve their wealth, more volatility enters the Gold and Silver markets. We have seen that volatility ramp up as Gold has moved toward, and through new historic highs. Thus, the fundamentals for Gold and Silver are very strong in this time period, and we have seen their prices advance in response.

Fundamentals will always rule any market over any decent length of time. Yet, there are other factors in play that help to determine price in the marketplace. The other major determinant of price is the psychology of investors. Investors buy and sell based on what they perceive the fundamentals to be, not based upon what the fundamentals truly are. Thus, there can be a disparity between the fundamentals of a market and the perceived fundamentals of a market at any particular time. At this particular juncture in history, I believe that investors are struggling harder to understand what the true fundamentals are than at any other time in history. I guess I am saying that in reality no current investor has ever seen this particular market environment at anytime in their past. Such a situation leads to an overall increase in the level of emotions that plague investors. Greed and fear take control, sometimes to the point of preventing the investor from acting- from making logical decisions…….."but I won't do that."

Why is the current investing climate so different from most of history? Well, we have attempted to cover these fundamentals in the past, but I think it is worthwhile to review since I do not believe that anything substantial in the most basic underlying fundamentals has changed over recent years. Yes, I said, "Nothing has really fundamentally changed." We still face what I have called the massive deflationary backdrop in the K-Winter period. We are now seeing some of the individual symptoms of that deflationary backdrop inundate the major news media reports, but those problems were always present; and "the Fed and Friends" were surely well aware of their presence lurking in the background. Thus, the same massive deflationary backdrop that has motivated the Fed to try to fend off a panic which might lead to the economic death spiral of a dreaded K-Winter deflation is still the main motivator for the Fed's actions.

To go a bit further, we have entered the time-frame where all of the excesses of previous decades created by a fiat paper currency system have accumulated to become a real problem that must be dealt with, or we will face a deflationary economic death spiral panic like we saw in 1929. We currently have massive debt at all levels- government, corporate, and personal. In fact, it appears that paper promises were taken to such an extreme this time around that a very large underpinning under these debt obligations was built- another massive layer of paper promises called derivatives which have laid tentacles into just about every part of life.

It appears that the Federal Reserve with Mr. Greenspan at the helm has elected to fight the massive deflationary backdrop with dollar inflation, the printing of very large numbers of US Dollars, along with dropping interest rates to a very low historic level. In doing so they are trying to fight deflation with inflation knowing that US dollar inflation will always lead to price inflation down the road. This has never been tried before in history, except for in Germany when the Germans were saddled with massive war reparation debts. The Fed knows that to be successful in this endeavor it must do more than just print dollars and keep interest rates low since it must also control the psychology of the investors to prevent a panic. A panic in any of several parts of the market could easily undue what the Fed hopes to achieve. The Fed also knows that there is a time component that must be met by delaying market movements out in time. I have used the term "The Fed and Friends" since it is logical that the Fed would rely on the Treasury and some of the largest of the trading firms to help in their efforts since these same groups are benefited as well.

Collateral to the main use of dollar inflation and low rates, other useful efforts might include the Treasury talking up a strong Dollar policy even though dollars are being printed at an ever-increasing rate. This is likely done as an effort to prevent the US Dollar from dropping too fast. To help in that area it appears that the government has elected to hide or to "cloak" the M3 numbers to prevent investors from tracking just how many dollars are being printed. It has also been suggested that the CPI has been tamed by the use of substitution and hedonic adjustments to make inflation appear to be much lower than it really is. In addition, adjustments have been made to the CRB Index which might be seen as the other inflation gauge, and the components of the very visible HUI Index have been changed around. How could changes in the CRB Index and the HUI Index contribute to the cause? Well, one might argue that if the true extent of inflation was obvious to investors, those investors might flee the general markets and bonds for the relative safety of the Precious Metals sector to protect their savings from the ravages of inflation. The CRB Index is an instrument that one might use to determine how much inflation might ravage the value of one's portfolio. The HUI Index might be seen as an alternate investment choice to protect the value of one's savings since the Precious Metals stocks are leveraged to the price of Gold and Silver. What one cannot hide, one can create questions about by making changes within and Index in an effort to confuse investors.

Even with all of those moves, the Fed and Friends still must seek to help regulate liquidity flows between sectors of the markets. It is, in my opinion, those cyclical liquidity movements as choreographed by the Fed and Friends that has created the fractal movements that we have followed. Another aspect of those movements is created by "Friends" as they trade the paper gold market and short it as the price rises into certain resistance areas. Those shorts into natural resistance areas help move liquidity out of the Precious Metals sector at crucial times, and over to the general markets during periods of more acute deflationary scares. This helps to prevent Gold and Silver from breaking free in a runaway move that would suck the life blood of liquidity from the Bonds and the general markets. Additionally, those trading tactics help to delay the time factor essential in the Fed's fight against the K-Wave cycle- to some extent at time cycle, if you will.

[Please notice that nowhere in the above statements did I ever use the term, manipulation, though I have strongly suggested that the Fed and Friends have a great need to heavily manage many items in this environment of a massive deflationary threat. First, I don't think there is a need for an investor to get frustrated to the point that he believes that the most basic fundamentals of the markets cease to exist. The Fed and Friends can try to affect market movements, but they can only delay what the basic fundamentals of a market will dictate. They cannot affect the direction of the fundamental trend for any lengthy period of time. To a large extent the Federal Reserve and the Treasury is responsible to set monetary policy in regards to how many Dollars to print and in setting interest rates. The Treasury has the responsibility to help reduce unwanted volatility in the marketplace. The large private trading groups have the right to trade the paper markets at will as do you. Rather than to complain about what these other entities are doing, I think it wise for the average investor to more wisely spend his time contemplating how the effects of these driving forces will affect his own investments. That certainly does not mean that the attempts of a group like GATA to address illegalities in the marketplace are not worthwhile. In fact, such work might be particularly important, especially if it is focused on the physical markets rather than the paper markets where the Fed and Friends retain much more legal latitude.]

Now, we finally get to what I find as possibly the most interesting part of the Fed's fight against the massive deflationary backdrop. The Fed has done a lot of talking about the psychology of the markets and the market participants. It seems that since the deflationary death spiral in 1929 was a panic, the Fed has to be very conscious of what investors are thinking- what investors see and focus on. Consider the following quote from a John Hathaway editorial found here at Gold-Eagle…………

"At a Sanford Bernstein conference May 31, 2006, even one time gold champion Alan Greenspan recently said in response to a question about the recent strength in the gold price: "There is only a relatively small group of investors who very seriously believe that there is a high level of risk that the (financial) system could break down. You only need a relatively small group to believe this to move the price of gold." In other words, the metal's price behavior reflects the trivial obsessions of a discredited fraction of investment opinion.

I wonder if Alan would still use the term "discredited", today? I find those remarks to be absolutely fascinating, especially coming within the time-frame that they were apparently made. This statement was made right around the very top of an intermediate move in Gold, Silver, and the HUI- was it not? Does this statement not seem a bit smug? "It only takes a relatively small group……to move the price of Gold." So, what would happen if a large group of investors elected to move to the safety of Gold to preserve the value of their savings? And that gets directly to the heart of the matter. It seems that the Fed and Friends have nothing on Pavlov, but that leaves the community of investors playing the role of Pavlov's dogs, does it not?

Let's get back to the most prevalent question of today. Why have the Precious Metals Stocks not moved aggressively on the upside during this time-frame, even though $Gold and $Silver have broken out to new historic highs? In my opinion the Fed and Friends through all of the tactics stated above have managed the psychology of investors about as well as can be done- an absolute necessity in their attempts to pull off what has never been tried in history. This is especially true in the face of the most glaring and most positive Precious Metals Fundamentals in all of history. The Fed is using alternating pictures of inflation and deflation to keep investors on their toes, scattering between the possibilities of Pavlovonian doggy pain and doggy pleasure. Potential Precious Metals stock investors appear to be caught up oscillating between whether the correct investment response is to inflation or to deflation. In a pure deflationary environment like 1929, Gold soars while the Precious Metals stocks drop like birds from the sky along with the general markets. In periods of inflation or stagflation like in the 70's, Gold and Silver soar while the Precious Metals stocks also soar as investors scream into the PM stocks in hopes of taking a leveraged position against rampant inflation that might ravage their savings. But, which one is it?

Nobody will ever know with 100% reliability when looking at the markets in real-time so here is the simple approach I am taking. It appears to me as I have described above that nothing has changed in the basic fundamentals of the markets, nor in the approach the Fed and Friends are taking to confront the massive deflationary backdrop. The general markets "broke" back in 2000, but the PM stocks soared while the general markets tumbled. I look around in real life and see nothing but inflation all around me. Deflationary news is hitting the mass media markets rather hard, but as a discounting mechanism the general markets should have collapsed in advance of such news since large trading firms have information in advance of us peons if the Fed's massive dollar printing was not capable of creating stagflation. I see a very substantial wall of worry hanging over the Precious Metals investors as most have succumbed to a loss of belief in the Precious Metals Bull. In fact, many former PM stock investors have now become "traders" as they worry over deflation versus inflation. Many newsletter writers, instead of looking to the most basic fundamentals to guide them, are trying to "explain" what is happening by grasping at straws which just increases the worry of potential PM stock investors. Yes, mining costs are rising and the failing paper promises are affecting the ability of the Precious Metals mining companies in terms of easy financing. But on the other hand, the inflation that causes the rising mining costs is also one of the main drivers of the price of Gold and Silver higher, is it not? And a rapidly rising price of Real Money Gold and Silver is the primary generator of higher earnings for Gold and Silver companies, besides being the prime motivator for PM investors to revalue PM mining company reserves higher, is it not? And with the potential for higher earnings and higher reserve valuations, investors will invest their savings in the Precious Metal sector thereby helping to fund mining projects rather than companies needing to depend on banks, eh? Have any of you seen some country named China looking over and investing in mining companies and projects? Do you consider them to be stupid investors?

Just look around. Deflation? The HUI bottomed at 35 and has recently seen an all-time high. The CRB is at all-time high. Food on the store shelves is showing rapidly rising prices. The Fed is still printing US Dollars out the wazzu, in fact, they are printing Dollars at an ever-accelerating rate. I laughed when somebody recently wrote that the Fed had just dropped the Fed Funds rate below the inflation rate as measured by the tainted CPI Index- that substituted and hedonically adjusted fiction that is the inflation understatement of the decade. The inflation rate from a common sense standpoint is probably above 10% so the Fed Funds rate has been woefully below the rate of inflation for a longtime. Now, it is ridiculously below the rate of inflation, and that should send investors flocking to the PM sector to protect their savings.

I think we are on the verge of a melt-up in the Precious Metals stocks as investors realize what the fundamentals really are. Markets can diverge from the fundamentals based on investor's incorrect perception of market fundamentals, but what happens when reality returns to their consciousness? Snap! Sure, the Fed and Friends are motivated to paint pictures of un-reality, but the bottom line is that they desperately need the inflation indicators higher as the general markets seek a deflation scare bottom. In fact, part of the liquidity flow game has been to short the PM markets into resistance shortly before the deflation scare bottoms of the general market to force liquidity flows to the general markets. Can they do so unless the PM sector has scaled to heights that are easily reversed due to PM investor leverage? I think not. I suspect that these liquidity cycle flows by the Fed are extremely important to their game plan as the general markets are the one item that they cannot afford to see drop below certain levels with the massive deflationary forces in place. In my opinion, the Fed and Friends desperately need the PM stocks higher, and soon.

I apologize for this long rant without the charts that we usually show, but I wanted to set the stage for our assessment of the charts and all of the fractal work that I will soon return with. We will likely move on to a review of the fractal work next, something that we will try to discuss in a bit more detail than usual.

In parting, I would like to advise readers of a decision that I have all but finalized. I am looking at the potential of moving my work to a private subscription site in the interest of being able to address more aspects of how what we present might better fit into an investment strategy. Such a move should free up more of my time to delve into individual stock charts as well as discussions of different aspects of various potential investing philosophies. This move should allow me to refine many of the different approaches that we have discussed in the past. Our approach will continue to concentrate on the Precious Metals Markets on an intermediate-term basis, though many charts might aid investors in other time periods. We also might extend our range out into other areas of investing in the resource sector. I have changed the contact address, below. Any readers who might want to offer an opinion on the above are welcome to contact me. We certainly still plan on continuing with our public editorials into the future.

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 who have positively affected my growth over the years. 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 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 http://treasurechestsinfo.com/Nuke/

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

Here is the link to a site I use to research the warrants of Precious Metals stocks. I will be discussing some aspects of the leveraged use of warrants later in this editorial series. http://preciousmetalswarrants.com/

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.