Originally published September 18th, 2011.

Gold has fallen back over the past week as expected, but so far it has not broken down from its suspected intermediate top area, which would involve its breaking below the support shown on our year-to-date chart below. Friday's action was positive and it is entitled to stage a minor bounce early next week, as it is now not far above this important support level and the support at its rising 50-day moving average, and in addition the compression signaled by the high negative reading of the MACD histogram (blue bars) is calling for an immediate bounce. However, the now very large gap between the 50 and 200-day moving averages, which has grown larger still over the past week, continues to call for a correction below the 50-day moving average, probably to the vicinity of the 100-day moving average now at about 1624, in coming weeks. Thus, after a probable modest bounce early next week, gold is expected to break down below the support and head lower.

The long-term 6-year chart is of course little changed from last week. It shows that gold has stalled out after hitting its top channel return line, as one would expect. What are the chances that it has entered some kind of super steep uptrend channel, as is being suggested in some quarters? - and that it will therefore bust out the top of the channel shown on our chart and forge ahead. Given that the dollar appears to have broken out to start a major uptrend, the chances of gold going nuts to the upside are thought to be slim - and the heavy volume in recent weeks as gold has pressed against the top of this uptrend channel is viewed as bearish.

It's worth taking an updated look at the dollar index chart here, as the outlook for the dollar is so crucially important not just to gold but to everything. The dollar staged an impressive breakout about 2 weeks ago, which we predicted just days before it happened. Over the past week or so, emboldened by its reacting back, some gold cheerleaders have sought to present the dollar breakout as nothing more than a short covering "blip", but that's not how it looks to us - on the contrary it looks like the "real deal", and if it is all traders and speculators had better sit up and take notice - before if you ignore the implications of this you are likely to get wiped out.

Because we value our time so highly we don't usually get involved with fundamentals much - mainly for the simple reason that all known fundamentals are baked into prices anyway - if you know something, then you can be pretty sure that the market does too. However, because the dollar breakout is signaling the emergence of a massively important fundamental factor that looks set to override all others we are going to take a little time out here to consider what is probably going on. Right now, gold and silver cheerleaders are presenting gold and silver as a win-win situation. If there is a major crisis in Europe, investors will flock to gold and silver as the only remaining safe havens, because the dollar and Treasuries are so discredited. If the crisis is averted by European politicians actually co-operating and by a combined QE onslaught by the ECB and the Fed, then it will mean oceans of newly printed money sloshing about, and gold and silver appreciating in response to anticipated inflation. However, the dollar breakout is signaling deflation but how can that be, given the predisposition of governments worldwide to keep printing money?

The natural corrective forces of deflation that have been attempting to assert themselves continually from the time of the crisis erupting in 2008, and even further back than that - back in fact to the recession of 2003 which Greenspan aborted with his policy of dropping rates to zero, have been kept at bay by politicians and central banks by means of printing money and dropping interest rates to zero, which of course has only made the situation worse, as the debts and derivatives have continued to pile up. Yet despite printing up trillions of dollars to throw at these problems and buy time, the US economy has not recovered, and the lingering recession threatens to deepen into depression. So what is going on here? - why has all this freshly cash failed to get the economy moving? In the first case the main reasons for the bailouts and QE were to help the Fed's crony pals in the banking industry and Wall St - not to help the economy at large and certainly not the man in the street. After privatising the profits for many years the game was to socialize the losses - push the bill for the party out on to society at large. This they have succeeded in doing spectacularly - but their bailouts and money printing have stoked the fires of inflation and made the middle and lower classes poorer. Here's the problem - the middle and lower classes are poorer, broke in many cases, with their income increasingly eaten up by rising prices, so they buy less. That means lower corporate profits, which means lower dividends and lower stock prices going forward, and also less economic activity generally, which will reduce the demand for commodities. What we are looking at here is demand failure in the face of rising prices, which will eventually stop those prices from rising - and you end up back with what you were most strenuously trying to avoid with all the money pumping - deflation. The forces of deflation will not be vanquished until the massive debts and derivatives problems are sorted by either making due payment (impossible because they are so large) or they are written off. These central banks and goverments are pushing on a piece of string with all their money printing - they can print as much as they like but can't force people to buy stuff, especially if they are made unemployed by failure of demand - and don't think that China can take up the slack - it's economy is already slowing down dramatically.

Deflation is what the dollar breakout is signaling, and the reaction of the past week is viewed as simply a post breakout reaction that will followed by renewed advance. As some of you may remember from 2008, deflation is "kiss of death" for commodities and stocks. This is why the silver chart has been looking so frail in recent months, and why gold is suspected to be topping out, at least on an intermediate basis. For this reason also we are now believed to be at a good point again to short the broad stockmarket and especially the banks.

The gold COT looks quite bullish, suggesting that gold is unlikely to correct back below its 100-day moving average on a drop. This is in marked contrast to the silver COT, which looks quite bearish.

Some guy wrote to me, a new subscriber I think, outraged and alarmed that the option position he had opened up just a day or two before had moved against him. So let's be clear - you don't go opening positions where you have the potential to make several hundred percent profit in a relatively short space of time and expect there to be no risk - the gearing works both ways, and this position still looks good. We have done really well with the judicious and occasional use of options this year, having used ZSL Calls to capitalize on the silver plunge in May, and Puts in big bank stocks to do likewise when the big US banks tanked - and we ditched them right at the bottom for a big profit. We also rode Agnico-Eagle up using Calls on its recent rally, selling them at the top. Sure you can make big gains in options, and we have, but the high profit potential comes with high gearing and thus high risk (although as a buyer you can't lose more than 100%). So if you can't stand the heat, then stay out of the kitchen!