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October 25, 2009

Fall Classic

As we all know, the name of the game these days is fiat. Normal, healthy economic cleansing processes are being countermanded by the distortive effects of monetary inflation. In order to protect wealth from this inflation... and not only protect ourselves, but make a living... we traders must purchase assets that rise as currency is devalued, namely precious metals. Starting businesses, creating jobs... actually producing something... has too many pitfalls due to lingering malinvestments (unproductive resources have not been freed) the threat of socialist programs which make business and job creation cost-prohibitive. The deeper iniquity of the actions taken by central banks lies in the fact that capital gains taxes are based on nominal gains. Therefore, we must not only place assets into inflation hedges, but we must do so in a leveraged manner just to stay even!

So naturally, the primary indicator in a trader's toolbox these days is the U.S. Dollar chart. The buck has been mired in a devastating slump since March, driving up equity prices, precious metals prices, and energy prices. As with all trends, the downward trend in the dollar will consolidate at some point. For several weeks now, I have been hunting this countertrend rally because I believe it will only separate to major waves down in the dollar bear, thereby setting up the largest run in precious metals of this bull market. At the moment, we await either confirmation that the rally has begun or a panic sell to end the current slump.

dollar chart

Should we get the panic scenario, lower pivots stand just above 74 and, of course, at the all time low at 71. Visiting the low in coming days would be a stretch, but not out of the historical norm for an ending panic on the DX. Such a move should spike gold and silver high enough to keep them above important levels ($1000 and $16) during the dollar's bounce. However, there is no guarantee we will even see a notable pull-back in precious metals.

gold chart

The breakout from that triangle into the springtime parabolic move produced a 25% burst. I expect the run into next spring to far exceed that move, taking gold at least to $1500 and perhaps much higher.

As for equities, they are looking tired. A panic sell in the dollar could give them another run at new highs, but it's conceivable they begin an early decline which accelerates once the dollar starts a rally.

s&p 500 chart

Similar price action exists on other large indexes. If a significant decline has truly begun, I would expect Monday's session to produce gaps that open below Thursday's low and stay down. Otherwise, I'm suspicious.

The coming week wraps up another month. Based on my monthly performance figures for '08 and '09, I'm thinking about just trading September and October and taking the other 10 months off! Kidding, of course. See you during the week.

 

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