While NFTRH was highlighting risk
leading into the initial phase of inflationary blow-ups – and surely
Egypt, Libya and other strained global situations are symptomatic of chronic
and disenfranchising inflation – it is important to understand that
headline events do not move markets, beyond the very short term.
Indeed, I saw enough last week to nudge the very
short-term risk profile toward neutral; and in an age of inflation onDemand one should question a net bearish stance
more often than not. Inflation ran the 2003-2007 bull market quite well until
ultimately, the soufflé pancaked in 2008.
Bloomberg’s top two headlines at
the end of the week: “China’s Wen
Targets Inflation as Top Priority to Cut Risk of Social Unrest” and
“US Stocks Rise as Economic Optimism Overshadows Increase in Oil
Prices”.
I want to spend some time breaking
down these headlines, before transitioning to precious metals analysis, where
we will take the macro pulse of the sector and review two core gold
explorers, from a technical perspective.
Back on message, inflationary policy
is what the asset spectrum feeds upon, as the ‘ruling’ class
(including you and me ladies and gentlemen, as asset speculators) benefits to
the detriment of the non-investor classes, in the US and the world
over. People are suffering due to the cheapening of the money used as
the medium of exchange for their wages, even as we go forth and speculate on
some high potential gold explorers, uranium prospects, emerging, productive
and/or resource rich markets, and other areas that offer opportunity in an
inflationary world.
Enter, the first Bloomberg headline above. In the article http://tinyurl.com/nftrh126a,
[edit: title since changed... hmmm] Premier Wen
Jiabao states “We cannot allow price rises
to affect the normal lives of low-income people” to which I would
answer “Mr. Premier, you have already allowed inflation to affect the
normal lives of low income (really low income) people, because you
have already promoted and feasted upon an epic and ongoing policy of
inflation. You now attempt to stuff the genie back in the bottle
because you see some frontier markets blowing up due to global inflation
dynamics and perhaps wonder how long it will take for the flames to reach
your homeland.”
From my vantage point in the downsized
productive (i.e. manufacturing) segment of the US economy, I have watched a
myopic and collective greed in the United States work in tacit partnership
with China to cheapen the entire concept of free trade. The US,
manufacturer of the world’s reserve currency, has been able to leverage
and monetize its reputation – built of sweat equity in the earlier
parts of the previous century (for ref. see my first ever public article from
2004, Frankemarket Lives http://www.biiwii.com/frankenmarket.htm) – in partnership with China, by selling Treasury bonds,
printing money and creating a heretofore limitless inflationary drag on the
US currency.
Edit: for an unbelievable view of that very different America, see
here: http://tinyurl.com/biiwii3811d
China, in pinning its currency to the
dollar, and accepting massive volumes of USD denominated instruments in
exchange for the work and productivity of its people, has inflated right
along with the US. Typical of politicians, the Politburo now tells the
people the straight deal after it is too late and presumably upon feeling an
implied threat as indicated by the Egypt and Libya uprisings.
China’s emerging manufacturing economy has been built by direct,
indirect and ongoing inflation.
A robotic talking head sums up the
second article http://tinyurl.com/nftrh126b:
“It’s a battle between the
negative geopolitical environment versus the very strong economic
fundamentals,” said Benjamin Pace, who helps oversee about $420 billion
as the New York-based chief investment officer of Deutsche Bank Private
Wealth Management. “The economic environment is very equity friendly.
The current geopolitical environment and its impact on oil prices, not so
much.”
No sir, it is a battle between the
geopolitical manifestations of inflation and the seemingly strong economic
fundamentals produced by said inflation as grains, clothing materials and
energy costs rise right along with precious metals in a not so tacit
indictment of these “strong economic fundamentals” that you speak
of. During the 2003-2007 cycle, the same thing
happened as a result of policy makers’ refusal to allow the economy to
purge itself through a hard downturn, which would have eventually set the
stage for a new and lasting up cycle. No, in and around 2000, the game
became inflation onDemand; inflation as
economic stimulant; inflation… it’s what’s for dinner.
Short-term, global and especially US markets are back in the game of blaming
oil for the market’s ups and downs. This is similar to the ending
stages of the 2003-2007 cycle. Be aware that
the majority of ‘Hope 09’ (and ‘Full Hubris 10’,
‘Suck-in 11’, AKA the inflationary cyclical bull born 2008, died… ?) has been attended by a positive correlation to
oil, copper, food prices… the stuff that people need; which brings us
right back to square one of this segment… the effects of
inflation are beginning to erode peoples’ lives and it is becoming
obvious. The actual inflation has been ongoing up to now.
Going forward, global policy makers will
not be able to merrily inflate their way to bull nirvana. See Wen above; see Trichet last
week talking about euro rate hikes. See Ben Bernanke… well, our
Fed chief has not quite gotten the memo yet. But even in the US, the
winds of change appear to be blowing. Whether our congress puts a stop
to it or natural market forces do (I’ll take ‘b’ Alex), the
inflation cannot go on uninterrupted forever.
And this, my friends, is where
investing and/or speculating becomes tricky. This is where the specter of
deflation or more accurately, a deflationary ‘event’ comes into
play. At the root of this dynamic is the case for the NFTRH ‘gold
stocks above all others’ stance, because it is in gold’s
‘real’ price that the gold mining industry finds its most positive
fundamentals, with gold outperforming the things of positive economic
correlation, including those that feed into gold mining cost
structures.
Increases in gold’s
‘real’ price are most pronounced during a collapse of an
inflationary construct, as in 2000 and again in 2008. This is usually
accompanied by deflationary hysteria and if one is prepared, epic
opportunity. Silver’s impulsive increase in relation to gold
argues that the construct may not yet be ready to roll over since a positive
silver-gold ratio (SGR) indicates that a sea
liquidity continues to rise.
On that note, let’s now
transition to the precious metals, commodities, etc.
Gary Tanashian
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