Gold stages a breaout.

Gold has resumed its rise. The critical price was a close above 1162/oz. That has now happened. Here is the breakout graph off GG, which I chose as a good pattern to indicate the breakout.The breakout is on large volume.

Not all is classically clear though. Europeans are buying dollars as the Euro fades as sovereign debt is eating national treasuries in Greece. Next will come Spain and Portugal.

I have recalculated an estimated high for gold and my numbers fall between $1700-$1900/oz. Oil moves between $87-$82/barrel and will stay up as long as he dollar maintains its value.Silver is slow.

When wikll gold break out?

Gold has now completed its reverse head and shoulder formation. This can be seen when plotting gold price itself (first graph) or when plotting the price of GLD(the second graph), one of the gold funds. I have used the 9 day moving average to smooth the daily data.

In order to try to pin down WHEN gold will break out of its post-reverse head and shoulder, I used the graph of GG, the second biggest gold-miner in the world. My task had to do with finding the wedge from which the stock price will stage its break out. As you can see, the wedge could be drawn in two-three ways and it points to sometime early May.

Ready?

Inflation takes off.

Gold prices continue to trace out a reverse head and shoulder formation, which is associated with a large breakout on the upside. The fundamentals and the technicals both point to a coming upsurge in gold prices. This is confirmed by the rising price of silver (about twice as much as gold in percent) and also the rise in oil price.

Gold had reached and closed above the critical price of $1160/oz then backed off slightly and is on the rise again. Oil hit $86/bbl then sold back to $80. As I write this, gold is again reaching for that $1160 mark, while oil is near $84/bbl. Experts give us several opinions. The believe that gold will set new price records this year and that oil may close above $94/bbl.

Checking the markets.

In a way, the US economy has become a measuring stick of the consequences of political decisions made by the electorate in 2006 and 2008 and the resulting ascension of leftist radicals into the highest echelons of government. So, in order to try to gage the consequences on the economy, we must look at the political trends that reflect on the economy.

I have already discussed how the Obama regime came to power through the manipulation of money velocity. The regime then proceeded in a predictable way: followed Keynesian economic theory and injected fantastic sums into the economy and embarked on a distributionist path. For a time, the inflationary forces unleashed by vastly enlarging the money supply has been balanced by the deflation caused by the takeover of the mortgage and automobile business and part of the banking sector. The vast increase in the money supply can be regarded as wealth distribution, because it is used by the regime to enlarge the government. The regime operates on a neo-Marxist idea that the upper earners have stolen their wealth from those who earn less and that, therefore, wealth must be either destroyed or returned to the lower earners in order to equalize earnings. It is one thing to have goals and another to set up the instruments of achieving them, though. While, the regime has achieved its dream of socialized medicine, even the implementation of that will run into difficulty. First, a number of States will resist implementation of ObamaCare in the courts and second, because a number of States are taking steps not to comply with ObamaCare. In addition, the legislative battle to achieve socialized medicine in its current form has damaged the Democrat Party and its chances at the Fall elections. The declaration of Stupak from Michigan to not run for re-election converts a safe seat into a tossup, for example. Another rung of the redistributionist scheme, Cap and Trade, languishes in the Senate and is not likely to get anywhere by November.

In the short term, while the economy has come off the bottom, it has done so by increasing unemployment and increasing the national debt. The constant harping on the need for more taxes dampens investment and the government's presence in the capital markets reduces the availability of credit. This would tend to tell us that we are about to see a repeat of the Carter years, known as STAGLATION. And see it in spades (no pun intended, just a suggestion that this round of stagflation will be far worse than the Carter years).

The internal contradictions of the economy are increasing. While, further increases in foreclosures in housing and commercial real estate would seem to allow the regime to balance deflation against inflation, the forces of inflation are getting the upper hand. BarChart rates investments as a percent BUY or SELL and it rates gold as 72% BUY, silver as 80% BUY and oil as 88% BUY. All these point to increased inflation. While the inflation side is getting sturdier, the FED is mulling tightening credit. Part of that is necessitated by the poor results at Treasury options and the increased rate the bonds have to pay. The drop in TLT has reflected this, but TLT rallied back right along with the dollar. These rallies can only be regarded as temporary, an escape from the Euro into dollars and Treasuries. As the catastrophe of the economies and finances of the Social Democrat West unfolds, European and US currencies will suffer. In fact, some Analysts predict the demise of paper currencies.

Economy off the bottom.

The FED had crashed the economy on Sep 15, 2008, when it changed the accounting system and declared some of the biggest financial institutions bankrupt. The move froze money circulation, pushed the economy off the cliff and not so coincidentally, elected Obama. The resultant deflation wrecked the housing industry, decreased industrial production and had increased underemployment to over 20%. The FED responded by pumping in unprecedented levels of fiat currency (we became familiar with the concept of trillions) and the Obama regime responded by increasing the federal budget from 1.7T to 2.5T and increased the deficit from 400B to 1.5T.

Two thousand nine saw the warring of the deflation initiated by the FED and the forces of inflation. While inflation did not show up in terms of prices (because of the deflation), the FED could not maintain a deflationary environment for too long (no matter how much it might desire such an environment) for fear of setting off a revolution. As companies pared down their work force, increased productivity and workers refrained from asking for higher wages, inflation was kept in check. Well, almost. We saw the slow creep in oil prices and crude oil prices add to the price of everything. As I write this, crude oil is battering the $85/bbl level and some analysts forecast the price of crude to rise to $100/bbl maybe within this year.

The signs of inflation, though, are beginning to show in actual prices, now that deflation is slowing. The first graph shows the increase in manufacturing and the price of raw materials and manufactured materials. We see that prices are increasing rapidly. The second graph shows the increase in rail traffic, which is an indicator of economic activity. Rail transport has increased for most commodities (for 18 out of 19); up 63% for metals, 37% for scrap, 36% for ores, 28% for equipment, 22% for grain, 15% for coal and 14% for chemicals. While, this increase in economic activity is welcome, it comes at the expense of increased prices and an unprecedented rise in National Debt. While, the Leftist economists of Obama believe that the National Debt does not matter (because we owe it to ourselves - an obvious fallacy because a large portion of the debt is owed by other nations), the debt reduces the value of the dollar and pushes up the cost of servicing the debt. A drop in the value of the dollar will push up prices as well.

So, we are continuing with conflicting forces on the economy. On the one hand, we see some effects of increased efficiency and stimulus, but jolts from the increase in taxes (via the expiration of the Bush tax cuts) and Obamacare. We see increased inflationary pressure from oil prices going up as well as the prices of commodities and the tremendous amount of increase in the money supply. On the other side, there is still the matter of commercial real estate defaults, low consumer confidence and high unemployment. All this points to the repeat of the Carter years: STAGFLATION.

Some analysts predict the end of paper currency. The amount of debt has become unsustainable not just in the United States, but in Europe as well and debt is continuing to rise. For the time being, the FED is buying Treasury Notes and tries to maintain the pretence that these are viable instruments. But, the charade is getting more obvious as time goes by. Experts predict gold prices to rise to between 1,500/oz to 1,900 this year and at least $2200 next year. Since, the US govt and the FED can print and waste money to hold gold prices down, it will mean that gold and silver prices will skyrocket all of a sudden when the govt can no longer hold them down.