Excerpted from the February 13th edition of Notes From the Rabbit Hole:

We have already begun wrapping up with the summary above, but let's check the DGR, with Dow testing resistance and a gap in gold terms by daily chart. This could be viewed as an emotional retrace of the panic from the 'Flash Crash' of last spring.

Now let's get to a critical point of the analysis that has been carried forward for much of Hope '09. Please take a moment and reflect upon the weekly DGR chart above, then come back and we'll discuss.

Ready? Dow as measured in a real money surrogate (not inflated, not indebted, no 'income' return) topped out in 2000. This is Gold Bug 101, so let's move on. In 2001 everything changed as a secular cycle began when the wellspring of post Volcker goodwill ran dry and inflation saturation began to kick in. We are now ten years into an era whereby paper and digital money are used as economic fuel, with stimulus on demand. This is promoted by the Federal Reserve and funded by the Treasury Department here in the US, and by equivalent entities throughout the developed world.

The first shaded zone represents the 2003-2007 cycle that resulted from Alan Greenspan's inflationary policies at the turn of the century. It was kicked off by post-bubble monetary policy. It was also indicated by a notable bullish divergence by weekly MACD in the ratio. Stock markets subsequently recovered a bit measured in gold terms, but then continued on in their 'real' bear market, resisted every step of the way by the weekly EMA 100.

With the whopper of a panic in 2008, we now have a Dow upward correction in gold terms once again, sprung as before by a MACD divergence. Add the weekly EMA 100 of this ratio to our growing list of indicators to watch going forward. We are obviously in a new cycle that is doing many of the same things the late great 'Inflation Bull R.I.P. 2003-2007' did. The question now is in timing.

Recall that the 2007 spectacle ended with oil making a very noisy run to near $150 a barrel. Today, copper is at all-time highs, grains are exploding and we are on the precipice of a bubble, which would become the mother of all inflation induced bubbles if the T bonds yield (no pun intended, but I think another one of those little tag lines was just born). The best tag line however, belongs to von Mises: Crackup Boom.

If indeed it is to be a continued inflation cycle, the stock markets will probably continue upward, and gold will continue to shine a light of honesty as to what is behind the process. Silver would probably lead. Gold stocks might recover strongly and target our HUI 680 level, and yet their investment merits would be gone up in the smoke of an inflationary blaze. A world of investment possibilities (or more accurately, imperatives) would then open up. Gold and silver would be de facto money in this new Wonderland, even if gold's miners would be also rans due to rising cost issues. Vital commodities would not be money, but they would be 'grabbed' aggressively.

If however, just maybe things reverse in the heretofore ongoing macro inflation/deflation game back toward deflation and rising Treasury bonds, the gold stocks could potentially decline to the HUI 470 area or even lower if things get bad enough. This would be my preferred opportunity to invest because you just know the speculators would be puking them up with, but possibly to a lesser degree than gamed items like Rare Earths, Copper, Grains, etc. All of this against improving gold mining fundamentals. (Ed. Note: NFTRH currently holds a firm core+ of gold stocks, employing the discipline not to try to out think a still ongoing bull market. If the parameters do indeed change, so too will the investment stance).