The Bubble Inside The Bubble
Joe Nicholson (oroborean)
February 25, 2008
"Despite seasonality beginning to work against gold and silver, there is no bearishness or call to short here. Copper could be set to break out of a multi-year consolidation."
~Precious Points: Bull Markets in Metals, February 16, 2008
It would be easy
to give the most unabashedly bullish picture for metals week after week. The temptation to do so is very real given
that I’ve been a believer in the metals story since before the subprime
meltdown, before the faintest whisper of a possible crisis in exotic
credit-based derivatives began appearing on the web (but nowhere in the
mainstream commercial media). But this
week, though it seems a stall in the rally may be ahead if the Fed continues to
jawbone the issue of inflation, I am compelled to revise my charts in a
decidedly bullish fashion.
Any expectations
of a correction in metals have been given in the these updates in the context
of a larger bull market and it was in this spirit that recent updates have put
the burden of proof on the bulls, or on the metals themselves, to prove the
wildly bullish counts some might already have taken as a foregone
conclusion. And, as you probably know,
the metals took up that challenge this week.
Silver has been
mentioned several times in this update as the most likely to indicate the
future momentum in the monetary precious metals. Given a specific target to break, silver blasted through this
week, demolishing counts calling for a correction to $10 and reaffirming a very
bullish long term case, looming RSI resistance notwithstanding.
Inflation took
center stage this week and debate circled around whether rises in commodity
prices were a reflection of inflation or global growth. While this is somewhat of a false choice
since both forces are likely at work, is difficult to overstate the effect of
an average M2 money supply increase of $35 billion per week over the last month. In fact, this is precisely why metals can
accelerate so rapidly in the deflationary environment of credit de-leveraging.
The question of how fast the Fed can remove
it’s accommodation also recently came into mainstream consideration, something
first mentioned weeks ago in this update, where it was considered unlikely the
Fed will be able to raise rate very quickly any time soon. Isn’t rising interest rates what lit the dry
wood of unregulated lending and mortgage-backed debt in the first place?
And, as has been mentioned
in this update over and over, the Fed isn’t watching CPI right now, they’re
watching TIPS and other credit spreads, and in those terms, inflation
expectations are, in fact, reasonably well anchored – at least enough to keep
the Fed cutting rates one more time at its next meeting. Of course price inflation is a symptom of
monetary inflation, and monetary inflation is not just the swelling of the
monetary base. Once the credit crisis
begins to alleviate and banks lend money, that is create money through
fractional reserve lending, the money supply will increase again by leaps and
bounds… bringing on the real inflation and the serious new highs in metals!
The two scenarios
in the gold chart above reflect the strong bullish structure of this
market. The more bearish of the counts
envisions a c wave decline into the $800 to 850 area before (not necessarily in
the time frame depicted) before the real inflation picks up and carries gold
well beyond $1000. But the more
immediately bullish will see a triangle breakout which could already be the
start of the thrust to $1000. If this
is the case, a moderate seasonal consolidation is still likely before year end.
Wherever there is
an asset bubble there was always monetary inflation first – it is the bubble
inside all bubbles. But if there are
commodities reflecting a strong global economy right now it would probably be
the base metals. Copper, as mentioned last
week has just broken from a multi-year consolidation and is likely to soon retest
its recent highs. If RSI is an
indication, this one still has quite a distance to go before reaching oversold
levels. For daily updates, proprietary
indicators and much more, visit www.tradingthecharts.com.
Joe Nicholson
(oroborean)
www.tradingthecharts.com
This update is provided as general information and is not an investment
recommendation. TTC accepts no liability whatsoever for any losses resulting
from action taken based on the contents of its charts, commentaries, or price
data. Securities and commodities markets involve inherent risk and not all
positions are suitable for each individual. Check with your licensed financial advisor
or broker prior to taking any action.
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