With economies slowing
down in China, Japan, Eastern Europe and other regions of the globe, many
investors wonder if 2014 will deliver another global deflationary
epidemic. As Ill explain in this
commentary, the next six months has the potential to be the most exciting
period for investors since the 2010 financial crisis in Europe.
After the disappointment
of last weeks European Central Bank (ECB)
meeting, investors continue to wait in vain for a policy shift announcement
from the banks president Mario Draghi. Without a major news headline to sink its
teeth into, the gold price has been slowly hovering above its recent low of
$1,280 after finding support above its 90-day moving average.
Meanwhile the European Unions producer price index dropped 0.2% in February
and was down 1.7% year-on-year, as reported Wednesday. The
year-over-year decline was the largest since late 2009 and is part of a
growing body of evidence that deflation is rearing its ugly head in Europe
and in other regions of the globe. The PPI
report puts more pressure on the ECB to ease its monetary policy in order to
jumpstart economic growth in the EU,�� according to
Jim Wyckoff of Kitco News. Yet the ECBs Draghi refuses to act to head off the growing specter of
deflation.
The Markit
data firm has reported that the EUs composite purchasing managers index
fell to 53.1 in March from 53.3 in February. A reading above 50.0
suggests expansion. The survey said businesses reduced their prices for
the 24th month in a row, however, further underscoring the increasing
deflationary pressure.
Larry Elliott of The
Guardian observed that Draghi rejected the
International Monetary Fund;s
call for immediate action to combat growing deflationary pressures as the ECB
has adopted a wait-and-see approach��
before taking drastic measures to stimulate growth. Despite
warnings from the fund and the Paris-based Organisation
for Economic Co-operation and Development of the risks to the eurozone's fragile recovery,��
wrote Elliott, the ECB president said it was
still thinking about whether to embrace the unconventional approach to
monetary policy used by the Bank of England, the US Federal Reserve and the
Bank of Japan.�� Its
precisely that kind of hesitation that will allow the final hard down�� portion of the
deflationary Kress cycle to bottom with maximum impact later this year.
This should have definite repercussions for the gold price, as well discuss
later in this report.
Last week, Chinas
government announced a $24 billion economic stimulus plan in the form of
railway construction spending. The move was in response to recent data
which show a noticeable slowdown in Chinas economic indicators. The
countrys GDP is forecast to decline again to 7.4 per cent in 2015, even
though the rest of the world is expected to recover and increase its demand
for Chinese goods, according to the Asian Development Bank. Providing
some perspective on the China slowdown is a graph published on Thursday by Ed
Yardeni (http://blog.yardeni.com). The graph shows just how far
Chinas manufacturing sector has contracted recently.
Yardeni also pointed out
in an earlier posting that Japans government is in the process of making a
critical blunder, one that led to a previous bout with deflation in the
1990s. In 1997, Japan raised its sales tax from 3% to 5%, a move which
caused consumer spending to plummet. Today, Yardeni reports, the
government is doing it again, raising the tax from 5% to 8%.
Recent economic data in
the land of the rising sun suggests deflationary pressures are
returning. Household spending in Japan declined 2.5% year-over-year for
February; housing starts are down nearly 13% over the past two months.
Industrial production dropped 2.3% month-over-month in February.
With central banks all
over the world slow to respond to the growing threat of deflation, the
chances are increasing that this summer will witness another bout of global
market volatility not unlike the one that spread like wildfire in the
summer of 1998. That mini-global deflationary crisis, you may recall,
occurred during what was an exceptionally bullish year for the U.S. stock
market and economy. It affected everything from stocks to commodities
to currencies. By the time the 98 global deflationary wave hit U.S.
shores, the Dow Jones Industrial Average topped in July and was on its way to
an almost 20% drop in a 2-month period in what was one of the shortest bear
markets on record.
The lesson learned back
then was that deflation can spread very quickly in a reticular, interrelated
global economy. And that was in 1998, a time when the 30-year cycle was
still peaking. With the 30-year cycle down until October of this year,
deflation wont need much prodding at all to do its worst, especially if the
worlds central banks fail to act in a timely manner.
Earlier this year, gold
reaffirmed its status as a safe haven du jour when it benefited from emerging
market volatility as well as geopolitical instability in Eastern
Europe. At the next outbreak of global market turbulence, gold should
be in a good position to once again benefit from investor uncertainty.
Kress Cycles
Cycle analysis is essential to successful long-term financial
planning. While stock selection begins with fundamental analysis and
technical analysis is crucial for short-term market timing, cycles provide
the context for the markets intermediate- and
longer-term trends.
While cycles are important, having the right set of cycles is
absolutely critical to an investors
success. They can make all the difference between a winning year and a
losing one. One of the best cycle methods for capturing stock market
turning points is the set of weekly and yearly rhythms known as the Kress
cycles. This series of weekly cycles has been used with excellent
long-term results for over 20 years after having been perfected by the late
Samuel J. Kress.
In my latest book Kress Cycles,�� the third and final
installment in the series, I explain the weekly cycles which are paramount to
understanding Kress cycle methodology. Never before have the weekly
cycles been revealed which Mr. Kress himself used to great effect in trading
the SPX and OEX. If you have ever wanted to learn the Kress cycles in
their entirety, now is your chance. The book is now available for sale
at:
http://www.clifdroke.com/books/kresscycles.html
Order today to receive your autographed copy along with a free booklet
on the best strategies for momentum trading. Also receive a FREE
1-month trial subscription to the Gold & Silver Stock Report.
Clif Droke is the editor of Gold & Silver Stock Report, published
each Tuesday and Thursday. He is also the author of numerous books,
including, Kress Cycles. For more information visitwww.clifdroke.com
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