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With the US economy faltering or at best
tepid, and prices rising, and high oil, we have similar conditions that led
to stagflation in the US in the 1970s. We also have ongoing tension in the
Middle East, which contributed significantly to US stagflation in the 1970s
with the oil shock back then over Israel. The US also had a silver bubble in
the 1970s with silver reaching $50 back then when the Bass brothers attempted
to corner the silver market. That price would translate to $150 today
according to our calculations adjusting for inflation back to 1980.
So there are a lot of similarities to
stagflation in the 1970s and today. If stagflation holds, and there is no US
market crash, then metals should stay put where they are or near this range.
If stagflation gains steam, gold will resume a rise and silver might test $50
again. We need to see what happens this Summer.
And on the deflationary side of the
argument, the US is supposed to end QE2 by end of June. And markets have
tried to correct, silver already did being parabolic for a while. One
question is can the USD continue rallying and stalling the metal rally? And
if the outcome is stagflation, the USD rally could stall that or slow it.
The Dow is testing a critical level
around 12500, and looks weak. A USD rally is also negative on the Dow.
As we know, silver corrected about 25%,
right after the USD bottomed at 73on the USDX. We warned our subscribers two
weeks before that on April 25 that the USD was bottoming and silver was a
sell. Two weeks later the silver bubble broke up a bit hard.
But, interestingly, gold held rather
steady compared to silver, which, come on guys, had reached double the recent
price ranges from a former peak of about $20 for the last few years, then
reaching 2.5 times that when silver touched or tried to touch $50 this last
year. That was a speculation bubble which was going to correct regardless.
So, in a way, I would not use the major
silver correction as a measure to take any credibility from gold’s
steady rise to the $1500 range over the years. So, I discount the silver
rally/crash as being a total negative on gold prices. Silver is another
matter and can correct a good deal here too, if the USD continues rallying,
which today the USD is at 75.47 on the USDX, which is heavily Euro weighted.
We also indicated to subscribers the TSX
had peaked around 14000 that after the USD bottom alert, and that the Euro
was turning down two weeks ago. The Dow is stalled at 12500.
But a lot of big questions to see if
stagflation stays
One thing we have to keep in mind is
that in a couple of months there is going to be a verdict on the US debt
ceiling, with the US Treasury using bookkeeping entries to cover themselves
for a couple of months till the US decides on a budget.
Between the budget uncertainty and US QE
ending (supposedly) the uncertainty is high for US markets over the next two
months.
If stagflation is to appear, I would
think gold will telegraph this to us. The fact that oil prices are still high
and gold holding around $1500 after the silver correction indicates that gold
sniffs stagflation. But we do not know the outcome of changing/reversing
that$600 billion of US QE, and we do not know the outcome of the expected US
budget compromise…so the gold price is not certain here indicating
stagflation. But its resistance to correcting a lot is noteworthy, in fact on
many days in recent weeks the USD and gold rallied together. There is
certainly a flight to safety trend in the works with the USD vs. the Mid East
and the Euro turning down.
A hard market crash can easily appear,
if that happens, we might stall the US economy enough to rule out
stagflation, but that remains to be seen.
Remember the US is facing a big test of
its bond markets with all this new debt issuance, and who knows how much
tolerance the bond markets have now for any further US strains like big
budget controversies. So many questions are in the air.
But for the moment, with oil prices high
and Mid East uncertainty of a great magnitude, gold should hold stronger in
the metals complex than silver, which I am discounting as any major economic
indicator right now because there is a lot of speculation in it. It’s
kind of messed up as a reliable indicator. Silver has to be looked at
separately.
But right after our USD bottom call on
April 25, a USD bottom would have clearly popped the present silver bubble,
which it did.
We have price ranges we expect for the
next month for gold and silver and oil and the Euro for subscribers.
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Prudent Squirrel
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