According to recent statements by Bernanke, the Fed stands ready to act with further easing of monetary policy (QE3) if economic conditions warrant it. But let's face it, because the Fed has never been audited we only receive the data they deem fit to publish. We know the government lies to us about inflation, unemployment, GDP, etc. Does anyone really believe the Fed is publishing true accounting numbers? I'm starting to suspect Bernanke has already begun the next round of quantitative easing.
Politically QE is a hot potato and
impossible to publicly announce. But there have been enough hints (the
last FOMC minutes may have been the loudest) that it is clear that Bernanke
intends to print. Hey, we are in a currency war after all, and one can't win the
war if you don't shoot your guns!
First case in point; the CRB exploded
out of its three year cycle low in June just as I had predicted. Oil is
already knocking on the door of $100 a barrel again. Grains in many
cases have rallied 50% or more and show no signs of reversing. As a
matter of fact, the CRB is showing no inclination to even retest the
summer bottom. The complete failure up to this point of commodities to
retest the three year cycle low is in itself a warning bell that
something has changed. I think we can all agree that the global economy
didn't all of a sudden ratchet into high gear, creating a surge in
demand. Barring that, the only thing that would generate this kind of
explosive move without even a hint of a correction would be another
round of massive liquidity injections.
Another odd development is the action
in bonds. A month and a half ago the bond market started to discount the
inflationary surge as commodities launched out of their three year
cycle low. Mysteriously, two weeks ago, interest rates started to tank.
One has to ask themselves, who in
their right mind would be buying bonds with a negative yield in a
rapidly accelerating inflationary environment?
This sudden reversal in interest rates
is another warning bell, in my opinion, that QE3 may have already
begun, and Bernanke is already buying bonds in the attempt to hold
interest rates under 2%.
The next confirmation will come from
the stock market. As we have seen in the past, the daily cycle in the
stock market has tended to stretch far beyond its normal timing band
(35-40 days) during periods of quantitative easing. The current cycle is
due to bottom right around the next Fed meeting on September 13. If
stocks are still rising with no clear decline into a cycle low by
mid-September that would be a pretty clear sign in my opinion that
Bernanke is lying to us and QE3 has already begun.
If I am correct then the penetration
of the three year cycle trendline by the dollar index on Friday is going
to be a harbinger of hard times ahead for the world's reserve currency.
As many of you may recall I've been expecting the three year cycle low in the CRB to correspond fairly closely to a top in the three year cycle on the dollar index.
So far the rally out of the May 2011 three year cycle low has been very
weak. The dollar still isn't close to moving above the 2008-2011 three
year cycle high, and has now formed a monthly swing.
The dollar's three year cycle is now at
risk of having topped in only 14 months in a left translated manner. If
so, this greatly increases the odds that we will see the dollar index
fall below 72 and probably below 70 by the time the next three year
cycle bottoms in mid-2014.
If the dollar's current daily cycle
continues to drop all the way into the FOMC meeting on September 13,
then it will be unlikely we see any significant corrective action in
commodities or stocks for the next two weeks, and at that point I am
going to seriously entertain the idea that the Fed is lying to us and
has already begun the next round of bond purchases.
The big question though, is how do we invest based on this possibility?
First off one doesn't want to be short
if there is even the slightest risk that the Fed has resumed bond
purchases. Second, one has to ask themselves which sector stands to
benefit the most from another massive increase in liquidity?
The obvious answer is commodities. But
most commodities have already rallied quite significantly as we've seen
with the grains and energy. That doesn't mean there isn't more upside,
I'm sure there is. But I think much larger percentage gains are going to
be made in the precious metals as price and breadth are still quite
depressed in this sector.
The metals are now set to "catch up"
as traders take profits on some of their other commodity positions that
have already generated large gains, and look to put that capital back to
work in undervalued areas with more upside potential (precious metals,
It's been my theory for several months now that we saw a B-Wave bottom for gold back in May.
With the recent breakout of the
frustrating consolidation zone that always follows a B-Wave bottom, I
think gold is now ready to begin the initial phase of the next C-wave
Gold is now entering the high demand
fall season. It has been my expectation that gold will generate its
first test of the all time highs sometime this fall. If my intermediate
cycle count is correct (explained in depth in the nightly premium newsletter)
we should see a move above the A-wave top of $1800 and a rally close to
$1900 by late October or early November. At that point the intermediate
cycle will enter the timing band for the next corrective move, which
should prevent gold breaking out to new highs
Following an intermediate degree
decline in late November to mid December the breakout to new highs
should occur during the next intermediate cycle this spring, followed by
a retest of that breakout at the next intermediate bottom.
Yes I know these daily and intermediate cycle counts are
some what complicated and beyond the scope of this short article. I do
cover them extensively in my premium newsletter. Suffice it to say that
cycle analysis lays a general guideline for when to expect major
bottoms, and to a lesser extent tops. I like to think of it as a tool
that signals when to step on the gas and when to start tapping on the
While I don't think gold has much
chance of moving above $1920 this year, conditions are definitely in
place for a significant rally in the sector over the next couple of
months. Miners, and silver in particular, have the potential to generate
some pretty respectable gains over the next 2-3 months.
SMT premium newsletter.