Below is an excerpt from a study that originally appeared at Treasure Chests for the benefit of subscribers on Tuesday, February 21, 2006.

Some of you may be thinking talk about monetary authorities debasing the US Dollar (USD) is fine and dandy in an abstract sense, but how are we going to know what's really going on with M3 reporting discontinued coming up shortly in March. In answer to this concern, and it is a legitimate concern considering money supply trends / conditions are primary in supporting and pushing equity markets, we must point out not only will we then be taking a closer look at Fed portfolios for indications of what they are up to on the monetization front, what's more, don't forget we will still have M1 and M2, and modified high-powered money measures, along with money market statistics that will effectively tell us what the pubic and businesses are doing with their money. Furthermore, it should be pointed out that not only are the equity markets less of a lagging indication of what central authorities are up to these days because of the instantaneous effect of securities monetization, other markets, such as the currency and debt markets will also provide clues in this regard as well.

Just so you know we are serious about keeping up to date on what the boys down at the Fed are up to, here is a link to a page we have constructed that will keep an ongoing tab on the full spectrum of monetary aggregate measures reported that will be update regularly and drawn upon in our analysis work. In this regard, based on recent turns higher across the full spectrum of Rate Of Change (ROC) indicators presented in the attached, along with the fact that both the consumer and businesses appear to growing their liquid cash balances in money market funds, we would not want to be short anything in the equity universe at this point because these funds could be let loose at any time.

Perversely, but likely for only a short time longer, any surprise strength in the US economy due to latent effects of efforts on the part of authorities last year could cause further temporary USD strength while gold cools off a bit, but ultimately, it should begin falling in earnest sooner than later if growth rates in US monetary aggregates continue to accelerate. And of course it should also be noted that gold in itself is the ultimate barometer of what the Fed is up to, not that this knowledge will help us identify intermediate turn points ahead of time, if one ever arrives. (See Figure 1)

Figure 1

While it's true there are corresponding increasing debt balances to counter the rising cash balances noted above, history has taught us that as long as interest rates remain accommodative, as is still the case today in real terms, chances are at least some of this money will find its way into equities. And based on what we know about gold, its related equities, and the bullish signals the sector is throwing off, meaning inflation is the word until further notice, at this point we feel more comfortable looking for correction lows in equities as opposed to trying to pick tops. This of course does not mean that overbought corrections will not occur along the way, but its very important to understand that authorities literally cannot afford to allow equities to have any degree of what would be considered a 'normal correction' in our asset dependent economy. This is why gold has not had a meaningful correction itself since it took off back in 2001. (See Figure 2)

Figure 2

That is to say, monetary authorities around the world cannot take their collective feet off the gas pedal (money supply growth rates) for long periods of time without risking a 'grand accident' that could trigger a meltdown in equities. One would do well to remember Grand Super Cycle corrections have historically involved equities of the day, save precious metals and select commodities, losing almost all of their respective values, and eventually going off the board because of this. A stock like JDS Uniphase is a good modern day example of what one could expect to see in a broader sense once deflation grips macro-conditions. This is why gold is in the midst of its longest uninterrupted bull sequence witnessed in modern times, as seen above. But we also find it interesting to note this run is the terminal wave of a Grand Super Cycle sequence in USD terms for the metal of kings, as well. (See Figure 3)

Figure 3

As you may be able to surmise on your own, at least initially, this means one of two things. Either the USD is going off the board at some point over the next few years, or gold will complete its current terminal sequence and then be subjected to a significant correction in USD terms. Which is it? Well, if history is any guide, the correct answer is the USD will cease to exist in current specie. At the same time however, as with the fall of Rome, this could be a very lengthy process, with peak oil considerations possibly dictating the candor of decay not only in this regard, but of post hydrocarbon man as well.

There are many pieces of the puzzle regarding the above that need to be filled in for those interested in possessing an informed take on things as process unfolds, where experience tells us only hard work will keep one ahead of the curve. In this regard, we invite you to visit our site and discover more about how an enlightened approach to market analysis and investing could potentially aid you in protecting your finances and family life into the future.

And of course if you have any questions or criticisms regarding the above, please feel free to drop us a line. We very much enjoy hearing from you on these matters.

Special Note: All chart panels above were provided courtesy of The Chart Store.

Good investing all.