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Precious Points: Whos Crazy Now?

March 2nd update for members.

"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." ~ Precious Points: The Bubble Inside the Bubble, February 23, 2008

There was a time, not all that long ago, when being a "gold bug" carried the stigma of being a bit on the fringe, when accumulating physical metal was deemed akin to building and stocking an underground bunker complete with canned beans and tinfoil hats.

When eventually rumors of a crisis in credit-backed derivatives and a pending devaluation of the dollar began arriving regularly in the mail on glossy pseudo-newsprint ads that advised the movement of capital overseas, the talking heads of the corporate news channels were still singing the praises of an unstoppable bull market and a Goldilocks economy even as they made "liquidity" a household word. And then, as everything predicted by the lunatic gold bugs started to come true, the newly named Fed Chairman and Treasury Secretary were busy spinning tales of a "soft landing", assuring a fawning public the economy was sound and that "subprime" would not "spill over." Remember that?

Anyone who's read The Mogambo Guru knows the twinge on insanity, if not outright psychosis, that used to be the unique hallmark of the precious metals bulls, but which today seems to characterize the economic optimists and anyone else who believes deficits don't matter or that inflation expectations are well anchored.

But for all the talk of financial Armageddon, my own record of published articles to date has been relatively conservative in championing precious metals as simply a sound investment without recourse to disastrous end-of-the-world scenarios. If you were fortunate enough to buy gold on the day President Nixon ended the gold standard, and wise enough to hold it, you've seen your investment rise 2,700%. As Warren Buffet will tell you, that's market outperformance.

Well, it was an unabashedly bullish week for precious metals and, in fact, commodities of all kinds. And, where last week's update stressed the possibility of a hawkish Fed in light of hot inflation data, the green light for metals came on Tuesday when Vice-Chair Kohn explicitly described the downside risks to financial markets and the economy as "the greater threat to economic welfare in the United States", over inflation.

By his own admission, the central bank stands ready to prevent "an especially adverse outcome," he said. But given, recent history, do these officials have any credibility whatsoever? And even if he is correct, isn't the solution of re-inflating the housing market only going to accelerate the advance of precious metals?

Both charts from last week treated $1000 gold as an inevitability, with the only contention being whether there would a correction or consolidation beforehand. If, as some suspect, the coming week becomes a continuation of Friday's volatility, then gold probably will come under some selling pressure as profits are taken wherever they're had. How this or any situation is handled depends on the timeframes and investment vehicles being used, but long term accumulators of physical metal and even swing traders will consider any such liquidation to be a gift.

The same is true for silver, where those waiting around for prices closer to $10 will be on hold indefinitely as news of hitting $20 is barely mentioned in mainstream media. Most likely there will be consolidation under $20 if stocks continue their slide, think 4th wave, but even the best case scenario for the bears is a pullback to about $14, and that would still be a confirmation of the larger bull market. After that, the sky's the limit. Unless you believe the Fed is going to start raising rates by the end of the year and soak up the excess liquidity. Ummm, who's crazy now?

 

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