Wednesday, September 2, 2009

So, its all getting very interesting...

The inflationists are getting confused because the trade they have been planning for years is finally looking like its partially coming to pass. Stocks have gone up and gold and silver are rallying while we have a weak dollar. Problem is the dollar is not that weak and even if inflation assets such as gold and silver can rally a little bit...i think its rather ironic that its taking the same course that it has in the past.

This is rather ideal actually, since the fear trade is clearly what is occuring...but inflationists will grasp at any potential outlook that promotes the inflation thesis. Interestingly, the market selling off, gold rallying, Oil in a downtrend, CRB in a downtrend and the dollar essentially relatively stable is not inflationary action in my opinion.

As we can see in the charts below, in 2007 gold tended to move with the market until after the first crash and recovery. The fear of in the market at that time was never far away. So, almost to the day the SP500 failed to confirm its highs gold broke out and continued as a fear trade (with a little inflation talk through in). The reality is that if we are looking for inflation stocks should participate as well since they represent assets that should increase in relative value to the dollar.

Gold has a 72 day cycle which coincidentally comes due on Sept 10. I have in previous posts mentioned that the time projections for the completion of this countertrend rally were optimally occurring on September 11.  (666 and Sept 11 interesting if that were to happen)  Gold projects to 1050 to 1080 and could make a quick jaunt up there...I would expect some weakness similar to what we had in the dollar today and perhaps a move down to complete an ending diagonal. I would expect the market to bounce but not make new highs. And I expect that the Fear trade will be overcome by inflationists needing to sell when the realize they have been most likely hoodwinked by the Gold and Silver trading pattern and the contradictory movements in the stock market. All of which  scream - DEFLATION is coming.

So, the trap is the beast has to fall for it.

see also: Issues arguing against the top of Primary Wave 2 here

chart courtesy of Mattew Fraily at 
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