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Inflation Expectation Tuesday: Europe Takes Bernanke’s “Cash is Trash” Message a Little TOO Literally
As the whole
financial world now knows, Ben Bernanke wants to actively foster inflation by
trashing the US Dollar. Setting aside the fact that this is absolute insanity (inflation
has already hit the US), Bernanke’s made it clear that he wants to trash cash
to keep stocks up.
The only
problem for our esteemed Fed Chairman is that Europe’s banking system appears
to be even MORE adept at currency destruction than Bernanke’s money printing
trigger finger.
Indeed, the
Euro was recently rejected by the upper trend-line of its long-term trading
channel. This is EXTREMELY bearish as it means the Euro has posted yet another lower high in the last three years, which
means we’re likely on our way to even lower lows… as in even LOWER than the
June lows.
On one hand
Bernanke must be proud that the European banking system has taken his “cash is
trash” philosophy to heart. However, the bad news about the Euro collapsing is
that it will force the US Dollar higher (the Euro accounts for over 50% of the
US Dollar index). After all, the two currencies trade in near perfect inverse
correlation to one another:
As the Euro
collapses, we are likely to see more US Dollar strength, which will absolutely
KILL Bernanke’s inflation expectations… at least in the near-term. Sadly for
Bailout Ben, the US Dollar is still seen as something of a safe haven. And
consequently the US currency will rally as risk hits the financial system again
and the Euro collapses.
After all, investing in a country that will
default on its debt in the future (the US) is a lot more attractive that
investing in a country that is defaulting on its debt right now (Europe).
However, the
BIG question for Gold investors is whether or not the precious metal will hold
up during a serious US Dollar rally. Judging from the chart, we’ve got some
decent risk to the downside:
As you can
see, Gold has formed what appears to be a large bearish rising wedge pattern.
This is a classic termination pattern which usually resolves in a sharp
sell-off to its base (in this case around that would mean Gold around $800 per
ounce).
Understand, I’m NOT saying Gold is going to
$800 per ounce. I’m merely saying that if this pattern breaks out to the
downside, it predicts a large price move down which could result in Gold
breaking below $1,000.
However, in
order for Gold to do this, we would first need to see the precious metal break
below the lower trend-line of this pattern ($1,300) in a convincing fashion.
After that we would need to take out support at $1,250, $1,165 and $1,100.
The only
thing that could do this would be a recurrence I systemic risk a la 2008 (only
an event of that nature could result in the deleveraging necessary to force Gold
down to $1000 per ounce ).
Could it
happen? Well, if Europe goes through anything like what we did in 2008, it’s
definitely possible. But I would view most Gold corrections as buying
opportunities. In choosing between an asset that has acted as a storehouse of
value for 5,000 years (Gold) and an asset that is being printed by a lunatic
who intentionally wants to devalue it (the US Dollar), I’d go with Gold
anytime.
To conclude, my primary point is that we look
to be on the verge of a serious US Dollar rally (courtesy of the Euro
collapsing). This will bring commodities lower (including Gold) and cool some
of the inflationary heat we’re feeling in the US today.
In this environment, Gold is likely to
correct to at least $1,350 it not $1,325. However, if things get REALLY ugly
and we have another 2008 event hit, then there is the potential for Gold to
fall as low as $1,000 per ounce.
Personally,
I’m hoping this is the case. After all, the gains you can generate from a 2008
style event are unbelievable.
Good Investing!
Graham Summers
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Yes, Graham, it is certainly true that, for gold to fall to $1000, it would first have to fall below $1,300, $1,250, $1,165, and $1,100. Thanks for that helpful truism.
USD will be dumped by the rest of the world sooner than you can imagine, look what Oba got from the G20 and APEC , NOTHING
1) I think the relative weakness of the Euro is Not due to any special expertise on the part of the ECB, but rather due to the fact is the $US is Still a (slightly) safe(er) haven currency.
2) And I would encourage those who think commodities can't drop now to carefully examine their preconceptions.
When you throw extra credit into a credit saturated environment, pretty much by definition, there are no good (=productive) investments left for it to go into. So it ends up in wind farms and such, dodgy investments which (again, pretty much by definition) will fail to pay off.
And since the credit is only as valuable as its likelihood of repayment, the inevitable defaults erase the value of the credit, And impair the value of similar credit. Thus, it is DEflationary. No accident M3 still slowing.
bernanke and obama, uniting the world against the us
http://s7.addthis.com/static/btn/lg-share-en.gif
Has Bernanke mentioned "exit strategy" at all since August 27th QE2 announcement? I guess it's better not to mention little bothersome things like that anymore? "Let a sleeping dog lie," as my little friend says.
http://www.marketwatch.com/story/soros-increased-gold-positions-in-third...
Adding to his 'ultimate bubble'
Yes I am hoping it does take some correction to $1325, srsly.
Dumped all my gold, silver stocks yesterday for a profit, looking for a serious correction in gold silver stocks and lower gold and silver price will help push them down, so I can climb back into the stocks again.
I still have the gold silver bullion. Not worried about them as this poney ride has a long ways to go yet, it has only just go going. The end wont be pretty.
Will still buy silver coins from week to week as the buzz of putting a nail in JPM coffin is worth it......as long as all else do likewise.
The Euro will get taken to the woodshed, but that just eliminates another potential store of value. What's left? Long term that just makes PMs look better. Short term, well, a correction is nice when you are buying. I'm not rich so I'm forced to dollar cost average anyway.
Everyone is trashing everyone else. The Irish banks are borrrowing at 8% and lending mortgages at 5%. The world is insane. Gold, good wine, and ag land with electrified fences is the way to go. Hold onto gold, consume the wine, keeping good vintages for trading/bartering, and invest in the ag land.
I'm still stocking up on silver and others PMs. Regardless of where the Euro goes in relation to the USD, I'm still expecting both to race to the bottom.
Ohh, interesting thing to note is that I noticed recently that APMEX banks with none other than JPM! What a twisted system....
That upward wedge in the gold chart is invalid. It already destroyed Johny Bravo. It's really an upward channel coming out of an inverse h/s bottom...... and in elliot wave terms, a five wave impulse erupting out of an ABC correction.....
Minion, for gods sake, there's ladies present!
The Euro is toast ... the US Dollar is Dog Food...
Any paper asset is bad news in my house...
Must watch QE commentary.
http://www.youtube.com/watch?v=PTUY16CkS-k
I don't doubt that a serious US dollar rally will occur due to the Euro collapsing...but lower commodity prices? With all the money entering the system to once again, keep the domino's from toppling over...more money will be chasing fewer goods. I think those cheap plastic toys that China has begun churning out for the kids in the US to unwrap under on Christmas may be a bit pricey. I for one am asking Santa this year for a couple ounces of gold or silver. I'm hope one of those "rogue" missiles in California doesn't hit Santa's sleigh.
Yep. It's always like this: everyone is expecting a particular asset (in this case, Gold) to behave exactly the way it behaved 1, 2, 3, 4, 5 (take your pick) years ago. Well, the years go by, and things change. You might want to add an addendum to your post that at posites the change the exact opposite happens: the EUR tanks, and gold makes a series of new, higher highs.
GG
Yep. It's always like this: everyone is expecting a particular asset (in this case, Gold) to behave exactly the way it behaved 1, 2, 3, 4, 5 (take your pick) years ago. Well, the years go by, and things change. You might want to add an addendum to your post that at posites the change the exact opposite happens: the EUR tanks, and gold makes a series of new, higher highs.
GG