The following is an excerpt from commentary that originally appeared at Treasure Chests for the benefit of subscribers on Thursday, February 19th, 2009.

Or should I say, one will need be increasingly brave to live in a rapidly changing environment, strewn with perils and pitfalls not contemplated by the masses (mob) just yet. Slowly but surely process is taking hold in this regard however, and it will accelerate and spread like wildfire as the economy continues to contract, and conditions are officially deemed to be in Depression on a global scale. The consumer is pulling back, economies are turning in, and currencies are crumbling just as forecast on these pages many moons ago, where even Switzerland is already showing just how bad it is, which is surprising to many.

What should not be surprising of course is now nationalization of the banks is all the talk States side, with Greenspan at the front of the pack in adding insult to injury for battered investors considering he is a chief architect in the meltdown. Britain has led in this regard with the stealth nationalization of its entire economy essentially, and now they are talking about acceleration with the Bank of England calling for quantitative easing. As Bob Hoye points out in his latest however, whether it be called 'stimulus' or 'socialism' by another name, this kind of thing never works in the end.

This is why gold is rising, because investors know this and they want out of an increasingly 'shaky system'. What they are saying is they think once nationalized, that will be the end of the banks. And since they are the ones that borrow all the money into the system, this means a new form of money / currency system must necessary also be in the cards eventually, as well. So increasingly they hide in gold until more is know, not to mention it might also be needed to back new currency regimes in the future as confidence and trust levels both at home and abroad falter. (See Figure 1)

Figure 1

Given this is the time of year for gold to party anyway, this season it has a particularly good reason to rise, possibly good enough for it to take out significant four-digit resistance on a lasting basis. Why would it do that this year? Because both the economy and stock market are going to continue to meltdown, where the solvency of both companies and countries will increasingly come into question. So, as denoted above, although a breakout test might be in the cards off a double top near-term, it would likely be dangerous fading the recent Golden Cross (50-day moving average [MA] cutting above the 200-day MA) seriously.

Supporting this view is the now confirmed (2-day) break of the dollar ($) back into the sinusoidal that has been defining its advance, which is indicative of global deleveraging. The understanding here is the worse things get the greater the desire to reduce credit. So, with a great deal of $ denominated debt floating around the world, it only makes sense a sort of 'synthetic squeeze' higher would ensue due to deleveraging when came time to pay the tab. This is of course why gold and the $ can rise in unison, because informed individuals seeing the extent of the deleveraging taking place know what the implications are, with 'solvency' in both business and government becoming increasingly possible the more credit contracts. (See Figure 2)

Figure 2

In terms of a projected course for the $, from here I would not be surprised if it pulls back to test sine support before heading higher, likely breaking out into new high ground for the larger sequence. Correspondingly then, and as with the $, gold should also take out double top resistance soon as well, quite possibly advancing hundreds of $'s higher before a correction back down to test the breakout at $1,000 occurs. And as mentioned the other day, with gold bullion getting increasingly difficult to obtain these days, don't be surprised if precious metals stocks maintain a firm bid in spite of broad market weakness as investors are forced into paper. This is keeping the indexes well supported in spite of an increasingly questionable prognosis for the broads. (See Figure 3)

Figure 3

Still, like gold, technicals are getting over-extended for precious metal indexes, with 21-month exponential moving averages (EMA) fast approaching across the board. So again, don't be surprised if eventually weakness in the broads affects liquidity conditions here too. The fact volatility has been contracting while prices have been moving higher is a distinctive possible 'red flag' that another impulsive move lower could be in the cards once the effect of positive seasonals passes. Moreover, this could be taken as a 'deflation signal' if the broads were to fall at the same time. And it definitely looks like the broads are destined to fall far further if signals in the plot below prove accurate, however the sequencing might not be what most are expecting in terms of a typical post cash sequence, which again, is subject matter discussed the other day. (See Figure 4)

Figure 4

This though process actually solves a conflict I was having with the larger degree count on US stock indices, where in fact based on the Elliott sequence presented above, this move down will actually finish off the first Intermediate Degree wave lower of the larger Primary affair. This makes sense from the perspective speculators might start betting bearish with the seasonals this year, meaning spring and summer might hold some surprises. It should be pointed out 'seasonal inversions' are not uncommon in mature markets, which of course the present unwinding mania definitely qualifies. We will keep you posted on our thoughts regarding this subject matter as part of regular sentiment reviews.

Past such considerations however, make no mistake about it, any such bounce as discussed above might be from considerably lower levels, which is thinking that is confirmed with the pronounced 'crash signature' in the daily S&P 500 (SPX) plot seen above. I mean look at the divergence there, with the Accumulation / Distribution Indicator (A/D) still in the proximity of ALL TIME HIGHS, set against a deteriorating On Balance Volume (OBV) profile. In my mind it doesn't get any more bearish than that, with such a profile indicative of still blatant complacency set against the reality of the most dire economic conditions to ever hit modern times.

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Good investing all.