We take a look at the fiat currency cycle and why it is telling us to buy gold. This is not the first time the signs point towards buying gold, and it will not be the last. The time is right to make some money!
The Commerce Dept. came out with their February estimates of housing starts and they were up by 22%. This was the first rise in housing starts in eight months. Judging by how this market is grasping at any straws of good news, I would have expected the DOW to take off on a tear. Not this time. The Dow is up 13 at 7,229, the NAS is up 18 at 1,422, the dollar is up .26 (.33%) at 87.26 and gold is down $5.90 at $917.20.
Gold continues to hold up well considering the “good” news regarding the economy. Just like spring, there are numerous reports of life in the economy and President Obama is now being encouraging, proclaiming that things are not as bad as they seem. What? Whatever, if gold does not go to test the $890 level things look to be set for another assault on the $1,000 mark soon.
The Fiat Currency Cycle
The time table for inflation is based on the increase in the money supply, plus an initial lag in the price of commodities. From 1963-71, the Fed increased the money supply, but not dramatically, just steadily. Consumer prices rose due to the inflation being introduced into the system. The commodity prices lagged the building inflation and by not increasing they actually lost ground in inflation adjusted terms. By 1971, commodity prices were extremely undervalued and they exploded through out the 70’s, culminating in their highs in 1980. The lag in reacting to the inflation in the economy set the stage for the spring to uncoil and shoot upward. The history of the early1960’s through 1980 was based on relatively mild monetary expansion when compared to the monetary expansion of the last 6 months. Keep that thought in mind.
This same cycle was seen again in the 80’s through the 90’s. The following is a simplified version of the fiat money cycle.
1. The Fed prints money.
2. Consumer prices rise .
3. Commodity prices lag behind.
4. Commodity prices get really undervalued.
5. Commodities catch up and launch upward.
6. Higher commodities bring higher consumer prices.
7. The Fed raises interest rates to bring inflation under control.
8. The stock market goes down, down.
When the cycle is complete, it starts all over again! This cycle is repeating right now with one new hitch. The Fed and the global central banks are printing money at unprecedented rates, flooding the world with liquidity because of their fear of deflation.
We are currently in the early stages of Step 5. Commodity prices have been rising slowly since 2001. Between 2001 and mid 2008 commodity prices have risen over 5%. We are in the early stages of a generational gold bull market. Now add to that, the huge response, in monetary creation terms, to the “financial crisis” and you ain’t seen nothing yet!
There will be declines in gold, but we will be seeing higher lows and higher highs going forward. The Fed should raise interests rates to stave off the inflation being introduced into the system, but they won’t because they are fixated on deflation. They are lagging the situation just as the commodities have until the last seven years. The monetary expansion brought on by the “financial crisis” will bring inflation in a form that we have never before witnessed in this country.
Looking forward, I think we will see a new high for gold in the $1,075 to $1,150 range by June and then another bull market correction through the summer as the “stimulus” money gins up the DOW through the summer. In the fall we should see gold start moving back up from it’s higher low. I’ve got the time, you’ve got the brains, let’s make some money!
Buy gold coins and buy silver coins, NOW. These I would hold and not trade. Buy gold stocks as gold bounces off the $900 or the $890 level. As this next attempt at $1,000 unfolds I will let you know when I am going to take profits in the gold stocks before the summer sell off. There are huge opportunities out there and we should take advantage of them. All it takes is a little time and effort in order to rake them in.
Till next time, good luck and good trading!
More Gold Market Analysis:
- Inflation, Deflation and Patience!
- Gold and the Currency Crisis
- A Reoccurring Pattern?
- Is The Bond Market Pressuring The Fed To Rebalance The U.S. Currency?
- Gold Market Autopsy: On Hold