According to recent statements by Ben Bernanke,
the Fed stands ready to act with further easing of monetary policy (QE3) if
economic conditions warrant it. But let's face it, because the Fed has never
been audited we only receive the data they deem fit to publish. We know the
government lies to us about inflation, unemployment, GDP, etc. Does anyone
really believe the Fed is publishing true accounting numbers? I'm starting to
suspect Bernanke has already begun the next round of quantitative easing.
Politically, QE is a hot potato and impossible to
publicly announce. But there have been enough hints (the last FOMC minutes
may have been the loudest) that it is clear Bernanke intends to print. Hey,
we are in a currency war after all, and one can't win the war if you don't
shoot your guns.
First case in point; the CRB exploded out of its
three year cycle low in June just as I had predicted. Oil is already knocking
on the door of $100 a barrel again. Grains in many cases have rallied 50% or
more and show no signs of reversing. As a matter of fact, the CRB is showing
no inclination to even retest the summer bottom. The complete failure up to
this point of commodities to retest the three year cycle low is in itself a
warning bell that something has changed. I think we can all agree that the
global economy didn't all of a sudden ratchet into high gear, creating a
surge in demand. Barring that, the only thing that would generate this kind
of explosive move without even a hint of a correction would be another round
of massive liquidity injections.
Another odd development is the action in bonds. A
month and a half ago the bond market started to discount the inflationary
surge as commodities launched out of their three year cycle low.
Mysteriously, two weeks ago, interest rates started to tank.
One has to ask themselves, who in their right
mind would be buying bonds with a negative yield in a rapidly accelerating
This sudden reversal in interest rates is another
warning bell, in my opinion, that QE3 may have already begun, and Bernanke is
already buying bonds in the attempt to hold interest rates under 2%.
The next confirmation will come from the stock
market. As we have seen in the past, the daily cycle in the stock market has
tended to stretch far beyond its normal timing band (35-40 days) during
periods of quantitative easing. The current cycle is due to bottom right
around the next Fed meeting on Sept. 13. If stocks are still rising with no
clear decline into a cycle low by mid-September that would be a pretty clear
sign in my opinion that Bernanke is lying to us and QE3 has already begun.
If I am correct then the penetration of the three
year cycle trend line by the dollar index on Friday is going to be a
harbinger of hard times ahead for the world's reserve currency.
As many of you may recall I've been expecting the three year cycle low in the CRB to correspond fairly
closely to a top in the three year cycle on the dollar index. So
far the rally out of the May 2011 three year cycle low has been very weak.
The dollar still isn't close to moving above the 2008-2011 three year cycle
high, and has now formed a monthly swing.
The dollar’s three year cycle is now at risk of having topped in
only 14 months in a left translated manner. If so, this greatly increases the
odds that we will see the dollar index fall below 72 and probably below 70 by
the time the next three year cycle bottoms in mid-2014.
If the dollar's current daily cycle continues to drop all the way into
the FOMC meeting on Sept. 13, it will be unlikely we see any significant
corrective action in commodities or stocks for the next two weeks, and at
that point I am going to seriously entertain the idea that the Fed is lying
to us and has already begun the next round of bond purchases.
The big question though, is how do we invest based on this possibility?
First off one doesn't want to be short if there is even the slightest
risk that the Fed has resumed bond purchases. Second, one has to ask
themselves which sector stands to benefit the most from another massive
increase in liquidity?
The obvious answer is commodities. But most commodities have already
rallied quite significantly as we've seen with the grains and energy. That
doesn't mean there isn't more upside, I'm sure there is. But I think much
larger percentage gains are going to be made in the precious metals as price
and breadth are still quite depressed in this sector.
The metals are now set to "catch up" as
traders take profits on some of their other commodity positions that have
already generated large gains, and look to put that capital back to work in
undervalued areas with more upside potential (precious metals, especially
It's been my theory for several months now that
we saw a B-Wave bottom for gold back in May.
With the recent breakout of the frustrating
consolidation zone that always follows a B-Wave bottom I think gold is now
ready to begin the initial phase of the next C-Wave advance.
Gold is now entering the high demand fall season. It has been my
expectation that gold will generate its first test of the all-time highs
sometime this fall. If my intermediate cycle count is correct (explained in
depth in the nightly premium newsletter) we should see a move above the
A-wave top of $1,800 and a rally close to $1,900 by late October or early
November. At that point the intermediate cycle will enter the timing band for
the next corrective move, which should prevent gold from breaking out to new
Following an intermediate degree decline in late November to
mid-December, the breakout to new highs should occur during the next
intermediate cycle this spring, followed by a retest of that breakout at the
next intermediate bottom.
Yes I know these daily and intermediate cycle counts are somewhat
complicated and beyond the scope of this short article. I do cover them
extensively in my premium newsletter. Suffice it to say that cycle analysis
lays a general guideline for when to expect major bottoms, and to a lesser
extent tops. I like to think of it as a tool that signals when to step on the
gas and when to start tapping on the brakes.
While I don't think gold has much chance of moving above $1,920 this
year, conditions are definitely in place for a significant rally in the
sector over the next couple of months. Miners and silver in particular, have
the potential to generate some pretty respectable gains over the next two to
SMT premium newsletter.