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Easily the most vaunted question
within financial circles at present is the inflation question - will it keep
accelerating and will hyperinflation arrive eventually? For some, like Marc Fabre and James Turk,
the answer to this question is easy. Inflation all the way baby - with a
dollar collapse and hyperinflation in the process. And as the lights come on
for increasing numbers about what the Fed is up to, exporting it's inflation
to the world, this understanding will become an increasing self-fulfilling
prophesy, which will surprise the heck out of just about everybody
considering the still rampant denial regarding this most important issue. So,
this is why one needs to be bullish on inflation, and remain bullish no
matter how improbable all this seems, because this is no dream. No, it may
appear surreal to most, especially in developed Western countries, but make
no mistake about it - inflation and resulting price increases are just
beginning to take off, where the trend should now begin to accelerate, shock,
and awe.
At least this is what the charts are
telling me to expect. Even for me, where I view myself as a 'savvy
speculator', it's difficult to fathom the messages the charts are telling us
at the moment, with the most important result in the end being a possible $
collapse directly ahead. Now it's important understand this, where I don't mean
that that the $ could crash after a correction higher, which a great many
speculators are actually expecting this at present. No, no, no - I mean what
could happen here is the $ could begin plunging sooner rather than latter,
where as per our comments last week, as
far as fiat currency lifecycles are concerned, it's living on borrowed time.
Oh and don't forget about Figure 2 featured in that report last week as well,
you know, the one that shows the Fibonacci resonance related projection to
30. Again, it's hard to fathom a crash beginning right now after such a
dramatic decline in the $ over the past six-months (and longer), but never
the less it could still happen you should know, which is of course why
seasoned investors always maintain strong core positions in securities that
are trending in bull markets.
And in this case, that means you must
have core positions in tangibles; and at core here, because they are the
ultimate currencies in the group, one must have strong core positions in
precious metals - physical precious metals preferably. Why physical metals
and not the shares? Answer: Because precious metals are more like shares than
precious metals when volatility arrives in the stock market, where for
example they declined some 80% in the 2008 / 2009 debacle while gold, which
should comprise core physical holdings of more conservative investors, only
slid 25%. People who are looking to precious metals to preserve their wealth
don't need 80% crashes along the way because they are too stressful even if
they prove to be transitory. That's my view on the subject. More aggressive
traders would prefer more silver and precious metals shares in their
portfolios because of the leverage, where even conservative types should
diversify into these areas as well; however again, percentages depend on your
risk tolerances and objectives. What's more, a more conservative approach has
proven wise in the first 10-years of this bull market.
But you know what, because of various
factors, chief of which is continued non-participation by the
investing public, the next 10-years (yes the precious metals bull market
could last that long) may prove opposite, where more aggressive portfolios
excel. This certainly has been the case regarding silver over the past year,
where its performance has quadrupled that of gold. Concerning the shares, and
in referring back to a piece I did on this subject last month,
all we need to see is that rectangle currently housing the trade in the GDXJ
/ GDX Ratio broken to the upside and one will have a profound signal in this
regard, where the same kind of price action in all the precious metals share
to precious metals ratios (ex. HUI / Gold Ratio) would act as confirmation
the move is for real. And as alluded to above, this is in fact exactly what I
expect to happen starting later this year as more and more people wake up to
what is happening out there - the inflation - precious metals - everything.
First though, and allowing for further limited upside over the next six weeks
(into May - sell in May and go away), in all likelihood the $ will have the
cyclical / counter-trend rally discussed last week over the summer and into
fall. Then, the fun will begin.
Now that's the popular view of what
to expect moving forward right now - a predictable scenario based on logic,
limited evidence, etc. But upon deeper investigation of the issue we find
other empirical evidence in the charts that suggest precious metals (and
hence the inflation trade) might need to be held closer than ever directly
ahead, which likely feels counter intuitive to most at present. This is why
we watch the charts closely, to avoid making the mistakes of others based on
a false belief or being ill informed. If you are an active speculator, such
mistakes can prove very expensive. As an example, just take a gander at the
chart below and realize that if RSI breaks out to the upside in coming days
we will have a fresh buy signal in the inflation trade, which as you know
would be led by precious metals. (See Figure 1)
Figure 1
 
And just look at how far the above
relationship (Gold / Dow Ratio) has to move. It still has the lion's share of
its larger advance to match the 1980 high to go, where it's all coiled up
above key support, possibly ready to surge again. That's the picture here in
this very important ratio right now. The picture is telling you precious
metals are still cheap and potentially poised to make an immediate advance if
not in nominal terms, in real terms against stocks, which means the inflation
trade is alive and well. So, we could have nominal price declines in both
stocks (as measure by the all important and heavily manipulated Dow) and gold
with the latter exhibiting better capital retention in signaling any such
declines would be transitory, which is the same message being thrown off by
the Dow / CRB Ratio by the way, one of the buy signal remaining on the
inflation trade as it continues to decline. (See Figure 2)
Figure 2
Again however, please remember this
does not mean nominal prices must decline, specifically in the case of
precious metals, and especially if stocks don't decline. And in what may
continue to shock the masses, stocks may indeed remain buoyant longer than
most speculators can remain solvent if this following chart has any
predictive power, that being the S&P 500 (SPX) / CBOE Volatility Index
(VIX) Ratio, where if present strength persists, a double top is possible in
the not too distant future at this pace. (i.e. this is an inflation induced
manic move.) This would definitely wake a few people up, most notably
deflationists who fail to realize just how crazy and desperate those in
charge of the public trust have become. (See Figure 3)
Figure 3
What's more, a double top does not
appear capable of stopping the advance in the NASDAQ Composite (COMPQ) /
Volatility Index (VXN) Ratio, which looks set to break through double top
resistance on it's way to the Fibonacci resonance
related target at approximately 250. Maybe now disbelievers are getting the
picture too, where again, if the $ keeps falling, the US$ pricing of all
commodities will continue rising, which includes stocks given they are now
simply a function of inflation. And make no mistake about it, the US
government needs rising inflation (money printing) to pay for its increasing
expenditures, where no 'leeway' or slack within this process is now possible
without fiscal collapse. (See Figure 4)
Figure 4
So you see, acceleration of money
printing in the States will not happen voluntarily. Only the markets can stop
this, and based on the charts both above and below we are getting increasing
signals that allowing for relatively minor corrections like we have had over the
past few days, higher asset / commodity prices should be anticipated, at
least until the bond market(s) fall apart for real. This is certainly what
Bill Gross is expecting in being net short Treasuries
for the first time in his flagship fixed income fund's history. Can you blame
him? The US had to come up with over a trillion $'s in March between its
budget deficits, tax refunds, monetizations, you
name it, which is why the $ keeps on falling, and may crash if the pressures
keep rising. (See Figure 5)
Figure 5
The only thing that would suggest
gold will not reach Fibonacci resonance related resistance at approximately
$1525 (see above) this run is if the $ can close above 75.50. It must close
above this level to signal the move lower is over in the intermediate term.
If it cannot do that, then gold could blow through this resistance ($1525 to
$1535) and start pulling away from the channel indicated on the weekly plot
below. Such a move would most likely be parabolic, which would correspond to
a crash in the $. Of course nobody knows if this is going to happen, however
such an outcome is not as unlikely as it was last month; and, if the US keeps
conjuring up increasing quantities of unsubstantiated currency this month, it
would be more likely again. (See Figure 6)
Figure 6
Thus, the story continues to unfold
in surprising fashion to most, where at each extreme, from the educated to
the naïve, sensibilities are assaulted on a daily basis. So don't
attempt to fight what's going on here, simply position for it with a bias
towards the inflation trade given the evidence above, where even if there is
a nominal scale correction looming, you should know that eventually your
positions will be found to be on the right side of the larger trade.
This is why we say, 'be bullish on
inflation'.
And of course, good investing all.
Captain Hook
Treasure Chests.com
Treasure Chests is a market timing
service specializing in value-based position trading in the precious metals
and equity markets with an orientation geared to identifying
intermediate-term swing trading opportunities. Specific opportunities are
identified utilizing a combination of fundamental, technical, and
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