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Precious Points: The Bubble Inside the Bubble

"Despite seasonality beginning to work against gold and silver, there is no bearishness or call to short here. Copper could be set to break out of a multi-year consolidation." ~ Precious Points: Bull Markets in Metals, February 16, 2008

It would be easy to give the most unabashedly bullish picture for metals week after week. The temptation to do so is very real given that I've been a believer in the metals story since before the subprime meltdown, before the faintest whisper of a possible crisis in exotic credit-based derivatives began appearing on the web (but nowhere in the mainstream commercial media). But this week, though it seems a stall in the rally may be ahead if the Fed continues to jawbone the issue of inflation, I am compelled to revise my charts in a decidedly bullish fashion.

Any expectations of a correction in metals have been given in the these updates in the context of a larger bull market and it was in this spirit that recent updates have put the burden of proof on the bulls, or on the metals themselves, to prove the wildly bullish counts some might already have taken as a foregone conclusion. And, as you probably know, the metals took up that challenge this week.

Silver has been mentioned several times in this update as the most likely to indicate the future momentum in the monetary precious metals. Given a specific target to break, silver blasted through this week, demolishing counts calling for a correction to $10 and reaffirming a very bullish long term case, looming RSI resistance notwithstanding.

Inflation took center stage this week and debate circled around whether rises in commodity prices were a reflection of inflation or global growth. While this is somewhat of a false choice since both forces are likely at work, is difficult to overstate the effect of an average M2 money supply increase of $35 billion per week over the last month. In fact, this is precisely why metals can accelerate so rapidly in the deflationary environment of credit de-leveraging.

The question of how fast the Fed can remove it's accommodation also recently came into mainstream consideration, something first mentioned weeks ago in this update, where it was considered unlikely the Fed will be able to raise rate very quickly any time soon. Isn't rising interest rates what lit the dry wood of unregulated lending and mortgage-backed debt in the first place?

And, as has been mentioned in this update over and over, the Fed isn't watching CPI right now, they're watching TIPS and other credit spreads, and in those terms, inflation expectations are, in fact, reasonably well anchored - at least enough to keep the Fed cutting rates one more time at its next meeting. Of course price inflation is a symptom of monetary inflation, and monetary inflation is not just the swelling of the monetary base. Once the credit crisis begins to alleviate and banks lend money, that is create money through fractional reserve lending, the money supply will increase again by leaps and bounds… bringing on the real inflation and the serious new highs in metals!

The two scenarios in the gold chart above reflect the strong bullish structure of this market. The more bearish of the counts envisions a c wave decline into the $800 to 850 area before (not necessarily in the time frame depicted) before the real inflation picks up and carries gold well beyond $1000. But the more immediately bullish will see a triangle breakout which could already be the start of the thrust to $1000. If this is the case, a moderate seasonal consolidation is still likely before year end.

Wherever there is an asset bubble there was always monetary inflation first - it is the bubble inside all bubbles. But if there are commodities reflecting a strong global economy right now it would probably be the base metals. Copper, as mentioned last week has just broken from a multi-year consolidation and is likely to soon retest its recent highs. If RSI is an indication, this one still has quite a distance to go before reaching oversold levels. For daily updates, proprietary indicators and much more, visit www.tradingthecharts.com.

 

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