Earlier today we presented one of the 12 forecasts by Citi's FX Technical group which saw gold reversing recent drops, and soaring to $2400 by H2 2012 and far higher later on. Naturally, one argument is that this is simply Citi talking their books, and that one should be short when a bank is pitching a long. Of course, that is a valid interpretation. On the other hand, it is also possible that the recommendation is nothing less than a contextual recommendation of the what the big picture would look like if the bankers' grand plan falls into place. And the plan is simple, and has been discussed extensively before here: namely, to push the market to that critical triple digit threshold at which point Congress and the population (most certainly including the "99" which just happen to have 401(k) and other pension funds) will beg Bernanke to print. However, the traditional resistance has been the market discounting precisely this, and refusing to sell knowing that when the market drops, it will eventually rise: a traditional Catch 22. Which is why stocks in the US have lagged the correction in China and Europe for as long as they have - this has not been a decoupling as is widely misunderstood; what it has been is a delayed realization that Bernanke will not print until market discounting fails, and stocks flush. Then and only then will "salvation" come from Saint Ben. Which is actually precisely what Citi is preaching. In the next two charts, we see its recommendations for the Dow Jones Industrial Average and the S&P, as dropping to 9300 and upper 900s in the S&P, at which point the Fed will have no choice but to intervene. It is in this context that the lift off of gold will take place, and where the previously stated targets of north of $2400 are quite feasible. Yet, ignoring the price of gold, it is Citi's ultimate conclusion that is most disturbing: the bank finds eerie similarities in the current stock market formation with previous charts, both of which eventually led to World Wars...
We still expect 960-1,015 in the S&P 500 and 9200-9400 in the DJIA to be seen in the coming months
- The 1966-1978 compared to 2000-2012 dynamic remains our number one choice of the 3 Equity overlays. The backdrop of an Equity market collapse (1973-1974); a surging Oil price (1973-1974); a sharp fall in economic activity and rise in unemployment (1973-1975) and a collapse in housing activity (1973-1975) all have a “strong resonance” with some of the dynamics we have seen in the 2007-20 09 period. In addition the weaker USD and very easy Fed policy seen then also “resonate.”
- While we have already had a high to low fall in the DJIA of 19% off the May 2011 peak this overlay suggests that the ultimate move may be closer to 28% “peak to trough” and take us close to 9 300 in the first half of 2012 If so then a sub 1,000 move on the S&P 500 would also be likely (Possibly towards 960). If this is in fact the best overlay it would suggest that the 9,000 area could be the platform for an eventual bull market again within about 5 years (After a lot of choppy price action first- i.e. A trading market).
And it gets worse:
These other 2 overlays paint a less favourable picture overall.
- Choice 2: Has less history than the other 2 (4 years versus 11 or so) but fits very well in terms of the timing and pattern of the collapse and recovery. Price action incorporates the banking crisis of 1906-1907 and its aftermath.
- Choice 3: Compares the collapse of the technology bubble with the 1929-1932 Industrial index collapse. The 1938-1939 recovery came with the abandonment of the then version of mark to market accounting and the establishment of the uptick rule.
And the scariest bit:
Apart from price action some reasons not to like these are. 1. They both suggest that the 2009 lows would be re-tested by 2014-2016 2. They both preceded / led into World Wars 1 and 2 respectively.
So, charting our way right into war?