Gold correction accomplished.

Gold prices had been showing reduced volatility. Most of the time, gold prices have been increasing. However, gold had become overbought, which was shown by the gold price having been above the upper boundary in the graph for several days. I thought that a correction was coming (see last post). That correction occured as gold price fell today from 1,363 to 1,333. That was enough to bring the gold price back within the upper boundary of the expected range.

What happens now? Under normal circumstances, we would expect gold to come back to the 50 mark on the graph or even below. These downward jags represent the hesitation by buyers to re-enter the market as they wait for prices to come down some. Hower, the report from the gold market is that traders wait less and less, so gold prices might resume their upward march tomorrow. Regardless, whether gold starts its move tomorrow or Monday or Tuesday, the next high plateau is calculated to occur between 1,395 and 1,405.

Technically, there is no resistance to gold prices moving higher. A lot will depend on what the FED announces. The FED promised more QE if the economy softened. Well, it did, but the figures on unemployment are being fudged, so the FED may wait till after the election. Chances are though that the FED will print and gold keep rising.

Slight corrections under way.

We can see in the previous post that gold prices became overbought while the dollar became oversold. These conditions are shown by shaded areas. This will become corrected and price movements resume.

While, I believe that the FED is already doing quantitative easing, it is not doing so officially. The story making the news circuit that if employment and manufacturing numbers will be worse than expected, QE2 will be officially implemented at the November meeting of the FED.

What does this talk mean? Inasmuch as these numbers can be adjusted up or down, the FED has already decided on QE2 and its implementation is just a matter of timing and trotting out the proper excuses.

Another story floating around is that other countries (Japan for example) are already adjusting the value of their currency to blunt the drop in their exports by the drop in the dollar. Another story is that emerging economies (Brazil, India and China) are not that confident of their economic growth, so they are watching their currencies that these do not appreciate. This is a phony story though. China, India and Brazil are experiencing strong growth and do not need to debase their currencies to maintain their export advantage. All these stories are floated by the friends of the Obama regime to make QE2 palatable to the tune of a Trillion dollars.

And now IT begins.

What exactly is "IT?" It is STAGFLATION, first experienced during Jimmy Carter's Presidency. I have already posted on the Raging Bull, how these concepts relate: first comes DEFLATION as shadowy regulators changed the accounting system to 'mark to market,' declaring many financial instruments worth zero and thus bankrupting banks and financial institutions. That was done to stop money circulation (Sept 15, 2008) and elect Barak Hussein Obama as President. The deflationary phase was continued to nationalize GM and Chrysler, the mortgage industry, student loans, and a good chunk of the banks. The nationalization of medical care was done via legislation. Bankrupting of insurance companies is in the works, forcing everyone into government-run medical care. The bankrupting of the power companies and a lot of industry awaits the passage of "Cap and Trade," which will put a large tax on using carbon-based fuels and transfer the capital to third world nations. The Obama regime and its Democrat base intends to put people on unemployment, our current version of the CCC camps of the 1930s.

To accomplish this, the regime had to "print" money which caused monetary inflation. I have described how this printing works - it is called "quantitative easing.'

Monetary inflation means that more money is around with no increase in what it can buy. Thus, the value of the money (dollar) decreases. Along with the drop in the value of the dollar, the price of gold and silver increase, as do the price of commodities (beans, wheat, meat, etc) and other metals besides gold and silver. And of course, oil.

Monetary inflation turns into price inflation as the price of commodities increase, even if deflation continues.

I will now review the evidence.

The economy has slowed as the regime's stimulus becomes less effective and as the regime's policies discourage investment in the economy. The regime's apologists trumpeted a "Summer of recovery," but instead of that, we saw the beginning of STAGNATION. Growth was forecast as 3.5%, but it was revised to 1.5%. Then it was revised to 1.6% and celebrated as much better than expected. STAGNATION IS HERE.

The first graph shows the price of gold. The rise in gold prices is obvious. Gold reached a new record price of $1,320/oz last Friday. The rise in silver was even more dramatic and it closed at $22.10 on the CRIMEX. (No graphic needed to dramatize the change from $18 to $22/oz silver).

The next two graphics show the drop in the value of the US Dollar. You can see the closing of the Dollar below its previous low. The third graphic down shows the breakdown of the head and shoulder formation in the value of the dollar and predicts the Dollar to fall below 72 on the dollar index. The current value of the dollar is 78 on the index.

The fourth graphic is the price of crude, oil that is. You can see an upward bias in higher highs and higher lows. The fifth graphic shows a similar pattern and clearly indicates that oil has broken out of its recent pattern on the upside. Note also that smart money is buying up oil contracts. Oil price is forecast to hit $95 by Christmas. The regime wants higher prices.

Finally, what about the Stock Market? Accompanying the yet secret quantitative easing by the FED, the Stock Market is also breaking out. The next to last graphic shows the formation of a new "golden cross," the crossing of the 200 Day Moving Average by the 50 Day Moving Average. The last graphic shows the breakout of the Industrials from a reverse head and shoulder formation. This forecasts higher stock prices.

Summary. The Markets are now in sinc. The slowing of the economy enters us into STAGNATION. Monetary INFLATION is shown in the continued rally in gold, silver, metal and commodity prices. Price inflation is still down the road, but it has begun. Everything is being recalibrate in the terms of a cheaper US dollar, even stock prices (which are rising as the value of the dollar drops).

Putting this another way, stock prices are decoupling from the economy and are now driven by the falling value of the US Dollar. PRICE INFLATION will now increase. Finally, the stage is set for another round of increases in metal prices lead by silver and gold. The panic phase in gold prices should occur in 2012, but we should have substantially higher gold prices in 2011. In the panic phase, gold miner stocks should decouple from the gold price and go into the stratosphere.

Markets in sink.

We see the Markets moving in response to a yet secret Quantitative Easing. Gold is rising, silver is moving even faster and oil has reached $80/bbl. At the same time, the dollar is dropping at a rather fast rate. All the Markets are now in sinc.

Irish eyes are NOT smiling.

The unraveling of paper currencies continues. Ireland's spread between its bonds and German bonds hit an all time high, which means that Ireland has to pay a lot of premium to roll over its loans. But, the Irish do not have the capital and will have to be bailed out. Cost? A reported $25B. Doable? Perhaps. But, the Markets are already lining up Spain for a hair cut. Spain's debt has been downgraded and its inability to pay will become clear shortly. Of the EU members, none is keeping within the required 3% annual deficit. Which means, more money printing. Will the German banks absorb the cost? Unknown at present.

Gold has moved to $80/bbl. We have seen this pattern a number of times - oil moving up to 80 then backing off. However, oil is now rising in context of a falling dollar and so the oil price may stay above $80/bbl as we go forward.

I can not say this enough times, nor emphasize enough, that the Obama regime is Jimmy Carter in spades. This is not a reference to Obama's ethnicity, but a reference to the fact that the Obama regime is committing all the economic sins of Jimmy Carter, but in larger proportions - in spades.

The economic changes we see are part of what bedeviled Jimmy Carter: STAGFLATION. This has several elements: 1. an economic stagnation, 2. currency inflation, to be followed by price inflation and 3. a sharp rise is commodity prices, especially gold. High interest rates come later.

The first two graphs show the Baltic Dry Index on two different scales. The Baltic Dry Index reflects shipping prices, which in turn is a measure of international shipping, i.e. the international economy. The three large peaks in 2009 and 2010 reflect fluctuations, but in 2010, the BDI dropped reflecting the current slowdown. Oil prices moved to the 72-84 range, while commodities have increased.

2010 saw a huge deterioration in the US economy. Housing sales have dropped to the lowest level of score keeping, along with housing starts. Unemployment is still hovering near 10% and the breathless shilling of the networks about the "summer of recovery" and the "good news" in initial unemployment (4000 less than expected but still near 500,000 per month) should result in the revoking of broadcast licenses of the alphabet networks.

So much for the stagnation part.

Monetary inflation meanwhile is picking up steam. The dollar has been steadily falling in value and currently stands at 80.44, with its 50 DMA is about to break below its 200 DMA - signifying and end to a recent rally. Gold has been moving up and is currently trading at 1,291$/oz, heading to the forecast of $1,300/oz.

Price inflation is just beginning to pick up speed. Insurance costs are skyrocketing, reflecting the changes mandated by ObamaCare. There are two things holding back price inflation: oil prices have been lagging and deflation continues to force companies to keep price increases to a minimum. This is about to change.

The Stock Market rally is coming to an end. The bearish sentiment (very low now, but the graph uses the bearish sentiment inverted) is hitting record lows now, which reflects a coming drop. The low bearish sentiment reflects the recent advances in stock prices. THIS IS DECEPTIVE. Recent increases in the DOW reflect the rise in APPLE nation, but generally, the number of stocks rising continues to shrink, as investors concentrate on the fewer and fewer companies that are still doing well.

A drop in stock prices is coming. How big a drop? Folks using the Elliot Wave Theory forecast the DOW to drop to 4,000, while Uncommon Wisdom (using the cycle theory) forecasts a low of 9,000, maybe 8,700 in the DOW. Much of the driving force for the Stock Market as well as the Gold Market will come from the size of the FED's quantitative easing. Bernanke is worried that the various stimuli have not stimulated the economy, while the continuing deflation keeps inflation too low. It is precisely these sentiments that will cause inflation to become higher than desired by the FED. And with that will come higher interest rates and a demise of the dollar.

The last graphic shows the expected prices for commodities and the dollar. I think the effects will be more severe. During Jimmy Carter's watch the inflationary impulse was tame compared to what's coming. There was no threat of European currency failure and bond defaults. In today's dollars, gold should reach $2,400/oz, but the financial panic may drive it twice as high. We shall see.

Turning points.

Much is being made of the "Hindenburg Omen," a stock statistic that has always registered a certain level before a Stock Market crash. It has done so again. What is to be expected?

It is not the only 'omen' though. There are also movements in the economy (deterioration), Fed policy (real quantitative easing coming) and the gold market (upside move expected after Labor Day.

Most everyone has seen the deteriorating economic numbers. And you may have heard about QE 2 (Quantitative Easing #2). That was a phony. In a real quantitative easing, the FED credits itself with money it creates ex nihilo (out of nothing) then buys up Treasuries. In the so-called QE 2, the FED decided to invest maturing real estate bonds in Treasuries, not to increase the money supply, but to stop it from shrinking.

The Stock Market is about to undergo a drop and that will force the FED to do some real QE. They do not want the Stock Market to go to pot this close to the election.

A real QE will propel gold prices up and the dollar down. Gold is undergoing a reverse head and shoulder and gold prices are working on the right (up) arm. Technicals indicate a move to about 1,300-1,400/oz price range. Interestingly, the DOW is also doing a reverse head and shoulder. All this points to the start of accelerating inflation.

Is the correction in gold price over?

Gold price peaked in June then began to correct. The tops of the trading channel was connected with a green line. Following the double top formation in June, gold corrected about 110 dollars. The last few days, gold broke out on the upside of the trading channel and is trading at $1188/oz

as I am writing this post. The dollar is sharply down, while oil is past $81/barrel. All of this is confirmatory to a new increase in gold prices.