The markets are in flux, gyrating wildly from the influence of speculation on the direction of the Federal Reserve’s next move. Gold and silver are not immune to these influences and have suffered right along with the general equities markets. Add the effects of the summer doldrums, the much smaller volumes that are controlling the markets moves and we are set to see a return to the gold bull. Weak hands fear that gold’s rise may be over and are willingly capitulating at exactly the wrong time. It is my contention that a reversal is coming sooner rather than later. The current correction is providing us with another great opportunity to accumulate both gold and silver stocks as well as the physical metals themselves.
This is beginning to look like classic panic selling which is necessary before the bull market can resume. I am seeing signs of a bullish reversal, which should start shortly due to the oversold conditions that exist today in both gold and silver. Buying in this area may prove to be one of the best opportunities that I have seen in some time.
Inflation Factors and the Price of Gold
Gold and silver have not even come close to challenging their inflation adjusted all time highs. This is quite interesting considering how much the money supply has expanded since the last gold bubble popped. Factor in that a large percentage of the industrial countries are trying to jump start their economies with “quantitative easing”, negative interest rates and gold and silver are primed for an upward explosion. The following chart shows just how far off the inflation adjusted high gold is. Just click on the chart to enlarge if for easier viewing.
One very important thing to note about this chart is that it only runs through August of 2011, which means that it does not even include the $1.6 million in new debt that the “Community Organizer In Chief” has piled on the backs of the American people in the last twelve months! The system is riddled with inflation and Ben Bernanke’s attempts to conceal it will not last much longer.
This is not just a U.S. problem because Europe is watching their currencies implode as well. So far, the dollar has benefited from the troubles in Europe. I do not expect this situation to last much longer because, if the truth be known, the U.S. is in worse financial shape than many of the PIGS in Europe.
Investors in five European nations are dealing with negative real interest rates and are parking their cash in U.S. dollars, which have one of the worst real interest rates. The dollar has always been a safe haven, right? Not this time, because behind the scenes the M2 money supply has moved into record territory. Traditionally, this is the harbinger of hyperinflation.
M2, which is made up mostly of cash, demand-deposit checking accounts, savings deposits, and retail money-market funds, has seen a parabolic rise. According to the St. Louis Fed, M2 has risen at a 24.2 percent annual rate for the last two months. That is a $500 billion increase in just two months.
Apparently, there is a flight to government-guaranteed accounts. People are scared and it looks like Europeans are abandoning their banks and moving their money into the U.S. banking system, looking for security. Will this prove to be the smart move? History points towards no, but we will see shortly.
Bernanke’s Manipulative Gamble
The Fed is trying to panic buyers into accepting low interest rates in exchange for the security of their principle. He is doing this while sowing the seeds of hyperinflation quietly in the background. The increasing monetary printing behind the scenes explains why the Fed has not announced a QE-3 program. They are doing it behind the scenes with the printing presses as this next chart illustrates.
The Fed’s game will end badly, of that there is no doubt. The only question is when. Will it happen this Fall, or can the game be extended into 2013? All markets rise and fall with the changing of the “tides”, or conditions. The most important thing is to be in the game when that change occurs. We are on the verge of major changes in the status of fiat currencies and in the prices for gold and silver.
Currently the support for gold is solid in the $1520′s and $26′s for silver. These are the bottoms for the latest correction. The next move will be dramatically to the upside because of the money printing and the inflation that is building in the system. This is not the time to sell, this is the time to accumulate by taking advantage of what the Fed is doing to the money supply during the summer doldrums.
Fear is in the air and weak hands are surrendering their positions. Take advantage and move in before the public discovers what is really going on.
Till next time, good luck and good trading!