Turning points ahead.

Deutschbank puts out an indicator, that is the sum of a number of financial indicators, including VIX. The indicator has fallen to levels seen around the fall of Lehman Brothers. The indicator has a positive .98 correlation with what happens, so it is practically infallible.

What does this mean? It means that America's financial system is still in the dumps and that conditions are getting worse once again. Obama's prescriptions made the patient sicker. No surprise here. Just as Roosevelt's prescriptions did not fix the economy, neither did Obamanomics work. It is not supposed to work. A Community Organizer likes misery and wants more of it so there is a communist revolution.

The Stock Market is shaky and is ready to drop close to 9000. Gold is getting ready to march higher, but the dollar is not ready to topple yet. Maybe in the Fall.

Where is gold going?

I begin this blog post with the graphic I used in the last post. It is the gold price as seen on June 14, which showed a wedge formation pointing sharply up. In fact, highs in gold prices had become steady, while lows were getting higher. This meant a breakout from that pattern by early July.

The next graph shows the actual breakout on June 18. Gold set a new high in US dollars and then sold off a few dollars.

There are four questions that are of interest: 1. what is driving the gold price? 2. how high will it go this year? 3. what happens to gold miners as gold prices rise? and what is the estimated high in gold?

The immediate answer to the first question is shown in graphic three from the top. Physical gold purchase (non-ETF) as well as by Exchange Traded Funds have risen sharply through 2009 and are continuing to rise this year as well. Last year, the total world production of gold was 2,524 metric tons and 3,386 metric tons were sold to known purchasers. Part of China's purchases are not recorded. Recent purchases by Exchange Traded Funds (ETFs) are continuing to rise: Swiss Gold Shares ($500M) are rising fastest; Central Gold Trust of Canada purchased 6,485 ozes, Scott Physical Gold Trust purchased 230,000 ozes SPDR Gold Trust (GLD) intends to purchase 22.7 million ozes. While purchases are increasing, world production of gold is dropping.

Another reason for the rise in gold price is the financial turmoil in Europe and the US. The Obama regime is intent on destroying Capitalism by destroying the banks and the US economy.

How high will gold go this year? Experts I consult forecast a high of $1,350, a modest sum considering the ultimate high in this bull market, which is pegged in excess of $5,000/oz at the end of the mania stage.

The next graph compares GLD (green), HUI (the gold miner basket stocks, blue) and the S&P 500 (red). We note that during May, gold miners took it on the chin while recently, they followed the S&P 500. Sometime in the future, gold mining stocks will take off and increase in price faster than GLD. When? Not known now.

Finally, a number of the world's powers are trying to produce a reserve currency to replace the dollar. I show the coin produced by Russia and the nick is my doing introduced by a mistake in copying. The Obama regime is printing money by the trillions and keeps inflation down by collapsing the economy via deflation. This may become the reason that ultimately pushes the dollar into a free fall and sets gold on a course that will push it to $6,000/oz. Jimmy Carter days are back.

Gold to break out soon.

Gold shows a trading pattern that we have seen a couple of times: a series of rising lows. The signal is for gold to break out to new highs between now and the first week of July. The breakout can occur at any time and is likely come soon. The dollar has stopped rising and is falling today, its bear market rally may be over.

Europe's eyes will now be riveted on the world cup and the coming financial crisis in Spain. Will Spain be able to roll over its debts? Will Italy, an aging team, be able to hold off Holland for one more tme?

The coming rise in gold prices signals a further series of troubles in European finances. This time, the dollar may not rise as much as when the Greek crisis broke, but gold should do a big bump.

Economic failure dogs Obama.

Barak Obama had promised to lower the sea levels, end partisanship and institute racial harmony. The suckers listening to him ate up the balony. The reality is something else. The sea levels are irrelevant for the Pacific Islands that are growing in size. Partizanship is ever greater as people sense that the Obama crowd is bent on destroying Capitalism.

What is emerging is an economic failure coupled with incompetence. The stimulus failed to promote private industry. As many of us chronicled, it was designed to prop up and create government jobs. Private industry is failing and American icons such as GM, Chrysler and banks have already failed. Other industries like GE, US Steel and Alcoa may soon be taken over by Obama.

The drop in jobs created and the Stock Market signal troubles ahead. The graph I included show that during a bull or bear market, the S&P500 moving averages move in a parallell fashion, but during transition times, the averages diverge. The current divergence signals a coming drop in stocks as economic stagnation continues. Inflation has barely started and is masked by deflation caused by the collapse of the industrial sector. As government revenues fall, money printing will pick up and so will inflation. By now you should be out of stocks.

Is the US dollar doing a double top?

Most of the Analysts I read consider the US dollar in a bear market. However, the dollar moved from 74 to 86 from December to now and then is making a small formation that looks like a small double top. The double top is a sign of a loss of strength of the underlying issue being traded and the formation is confirmed when/if the second peak breaks below the trough between the two peaks. In this case, it would be a break below 85. Double tops are notoriously unreliable for prediction.

Longer term, the dollar may be setting up for an even bigger double top (see the second graph), where the confirmation point is 74.

Contradictions.

Brokerage houses tend to be optimistic. That is perhaps what fueled a letter I got telling me to expect a rally in stocks. Buy, buy, buy is the conclusion. The first graph shows the tea leaves the technicians read. The Market is clearly oversold, so we had a 200 piont rally in the DOW.

The second graph shows what the economists see. While, M3 is no longer published by the government, it can be calculated and M3 is falling at a rate not seen since the Depression. Today's discussion on Seeking Alpha (The Consequences of M3), tells us that government is driving us into economic depression. How is it done? While, the FED pursues a loose money policy on the surface, underneath, a small Agency requires the banks to put up 15% capital as reserve for every loan they make. That, of course, precludes the bank from making any money. So, while the FED pretends to follow a loose moinetary policy, the OCC counters it and is driving the banks into either supporting the regime in buying treasuries or fail.

The consequence is stagflation and eventual collapse if the regime is not removed. The last graph shows the gold price during the 70s and during this decade. It is earily similar. The graph predicts an explosive rise in gold prices to as much as $6,000/oz of gold.

What now?

What a difference two weeks make. My last two posts on the economy, gold and the Stock Market touched on the topics of the increasingly grim looking European debt, predicting a breakout of gold past 1162 and topping out of the Stock Market.

So, what happened? Gold broke out and set new highs, the debt crisis identified and the Stock Market is teetering again.

What else has happened? While, gold set new records (1284), gold mining stocks lagged the increase in gold price. That suggested a drop back in gold price was coming and sure enough: gold dropped back to 1175 and finished the week at 1176. That sets up a powerful buying opportunity.

What about the economy and the Stock Market? The economy continues to sputter, but IMO it is early to expect a crash. It is like there is an evil spirit that continues to give the Obama regime advice to do the wrong thing. To be sure, the regime welcomes the crises it creates, these crises are excuses to grow the government and destroy Capitalism. Also, economic stagnation is hoped to deter inflation.

The Obama regime sounds like the Greek officials in the early stages of their boondoggle, when they trumpeted that they could borrow all they wanted to borrow at 3% interest. At some point though, that changed and changed all of a sudden. As the Obama regime prints money and kites checks to pay for the deficit and the takeover of business, it is setting the stage for the destruction of the dollar. All these trends will keep sending gold higher. At present, the failure of the Euro drives Europeans into dollars, but the FED opening the dollar window for European banks in fact ties the dollar to the Euro.

Investors are nervous and are selling equity. Interestingly, gold mining stocks have stopped falling, perhaps anticipating a new rally in gold.

How far will the DOW fall this round? Will it settle for a 10% correction to 10,000 or continue toward a 31% correction, back to 8,000? Will it touch 12,000 before it sinks back and leaving the smaller stocks to flounder? We might get an inkling next week.