"that that was supposed to have frightened you, but somehow you never took to fright" -- Roky Erickson, I Have Always Been Here Before

Quickly transitioning from archetypal American rock culture to the subject at hand, we look at the gold market and find all the familiar forces arrayed in their various familiar battle stances, with a few bullish wrinkles this time around.

• Goldbug captains call on their troops to keep a stiff upper lip, even as many quiver uncontrollably and retreat back down Hamburger Hill.

• The d Boys (notable Deflation figureheads) are fully out of the woodwork, no longer being ridiculed but rather, being reinforced by throngs of believers coming out of dormancy - not coincidentally with the permission and psychological backing of the US long bond. Just as this blog has been outlining since everybody KNEW that inflation expectations were about to get out of control back in the spring.

• Gold - the last bubble in the eyes of the d Boys - takes the hit amid gold bug fear, gold adviser bearishness (Hulbert's HGNSI @ 9.2%) inflation believers on the run and the chart... oh my lord, the CHART of gold is BREAKING DOWN!!

• I am told that a well-known inflation perma-bull (precious metals, oil, gas, water, etc.) has admitted in his podcast that he is short gold stocks. His stance was opposite this in 2008, as was that of the majority of commodity, resource and precious metals (i.e. inflation) bulls. Folks, if you think this is bearish for the gold sector, think again.

I have always been here before. Since 2002 (my personal entry point into the secular bull market) we have witnessed this 'wash, rinse, repeat' cycle play out several times. As has been noted repeatedly in the newsletter and blog, the Deflation captains - smart economists that they tend to be, with a tragic and almost comical blind spot - are helpful to the process of protecting one's wealth over the long term with the monetary metal that is no one's liability. After all, would you rather buy on declines that start out as well and good technical corrections and morph into emotion-fueled, savage drops propelled by the herd's perceptions? Or would you rather buy hype-fueled runaway price increases? (A) please, Alex...

You will notice on the right side bar of the blog, there is an ad for BullionVault. It just appeared the other day and do you know why? Because I put it there in response to the declining price of gold. Previously, during gold's widely touted run to new highs there was a simple, static little BV ad for anyone interested. But with gold you buy the declines because it is always good to buy value when it goes on sale. This is usually done against a world full of smart sounding people telling you why you shouldn't. I have a chunk of cash in the BV account waiting to be turned from USD to bullion.

I have not really put a lot of technical analysis in the chart because I want to reserve that for the newsletter, but you get the idea of the story I am trying to tell. There are downside targets, sure. But this is a market people, and markets do what Beuller? Yes, markets go up and down within a secular trend. Meanwhile, despite all the furor there are two supportive moving averages that have not yet been violated.

Oh and to the d Boys, that is not a picture of a bubble... no matter how hard you click your heels, study Great Depression theory and ignore the fact that monetary authorities need you and your linear philosophy in order to kick start a popular mandate for more inflationary policy. In short, Ben Bernanke is playing you, whether intentionally or not. He needs your story because his power goes out the window if inflation expectations break out. This is again denoted by the monthly EMA 100 on the 30 year treasury bond, followed slavishly on the blog.

There will be deflation (reduction or leveling of money supply due to forced and voluntary popular deleveraging from a dangerous, exponentially levered construct) and there will be inflation (policy response with the full mandate of the people; well, a majority of the people who remain steeped in convention). It is the act of inflating against economic contraction that gold reacts to as the system is degraded further with each cycle. Authorities cannot inflate unless there is a dreaded deflation to fight.

As the economy weakens, gold outperforms assets positively correlated to it such as oil, base metals, etc. At this point, the leveraged instruments on the gold price - the gold stocks - enter the picture for patient speculators who see gold (their product) declining less than oil, metals and other miner cost drivers and think "hmmm, this can't be bad for their bottom lines". It is all thanks to the deflation impulse that periodically interrupts the continuum of gold's secular bull market.