The following is an excerpt from commentary that originally appeared at Treasure Chests for the benefit of subscribers on Tuesday, July 21st, 2009.
'Its only castles burning' - A piercing lyric central to a Neal Young classic and also an appropriate sentiment with respect to the paper castles burning in the world of finance these days. Whether it's a result of inflation or deflation - value is being lost - paper is burning - to reflect the value that never was. Our service-based economy is all an illusion you see, poised to burn like Rome at its turn, in grand scale. This what happens in fiat currency economies, where paper castles that are built on whims and flap in the wind, easily susceptible to the first spark that comes along. So, don't let such an outcome bring you down, find something that is turning (protect you) - that being gold - and you will come around just fine.
And if you get enough of these paper castles burning, eventually you will end up with a four-alarm fire. Undoubtedly that's exactly where we are heading eventually. It's only a matter of time before the imbalances that have been building for years, unacknowledged by the mainstream and bureaucracy as being material, yet torching one paper castle after another, eventually cause the need for a sudden currency adjustment or bank holiday, or both. So, the dollar ($) could plunge, and is in fact poised to do exactly that, which will bring a bid back into equities temporarily. And while both stocks and commodities would benefit from such an outcome, it should be noted that circumstances are coming together that would shine a particularly bright light on precious metals.
What's more, and like the paper castles that burn easily in such circumstances, long lasting paper games perpetuated by the bureaucracy in holding precious metals prices back could also succumb to a sudden adjustment finally, which would undoubtedly send gold over round number / four figure resistance at $1,000 on a lasting basis. And make no mistake about it; the message this will send out will be profound, likely drawing in sympathetic buying as the lights come on for increasing numbers. You should realize this is happening in the physical market right now, where a possible deluge of hedge fund buying (which might be enough on it's own) could soon be joined by a disaster bid (and worry of the corresponding need for hyperinflation) to fan the flames, this at a time when bullion supply is already tight.
Add to this precious metal share charts are sporting bullish indications these days (see below for details), perhaps in anticipation of such developments, and it appears we may have a recipe for a bull market on our hands, right when the public at large remains generally disinterested. In relation to our discussions on the seasonal inversion that is unfolding this summer, both seasoned traders and the general public alike appear to be expecting trouble this summer / fall, like last year, which is fueling the wall(s) of worry in equities. So, it appears we were right on the money with this call in spring. And if we were right about this, then it stands to reason our historical patterning observations are likely also correct, pointing to continued strength in stocks / equities well into next year. (See Figure 1)
Source: The Chart Store
Here, based on what appears to be a match with post bubble historical precedent on a comparable scale (i.e. cycle degree), the only question is whether more consolidation is in the cards at present, as seen above in the S&P 500 (SPX) / Nikki comparison; or, whether more near-term gains are in the cards before prices begin to move sideways. As you can see below in Figure 2, more gains cannot be ruled out, especially with US indexes all at new highs for the move with the exception of the Transports. Of course the Trani's are only 20-points away from their June highs at 3400, with a close above this mark indicating a confirmation of the primary trend under Dow Theory. (See Figure 2)
Source: The Chart Store
Special Note: It should be noted the horizontal scale for the S&P 500 (in turquoise) is labeled incorrectly, and should indicate a match with the post crash Nikki pattern would only extend until latter December.
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Good investing all.