Deflation or Inflation

My last post talked about Pretcher's call for US$650 Gold bottom. He supports a deflationary view.

I do agree so far with his call on the equities market. Been pondering over and over again and I got to say I am still skeptical about his precious metal direction. For the past few days, both Gold and Silver had been consolidating in a diagonal triangle. The break, after ABCDE is completed, is either to the upside or downside in a big, fast way. On the other way, equities seemed to paint a Head & Shoulder picture and if 1013 is not surpassed quickly, the momentum should be to the downside. Price was up last night on SPX, but volume down. This is bearish.

At this juncture, most are on the consensus that the trend of both equities and commodities are in the same direction. USD is opposite. Hence, most expect them to be down at the same time, drawing similarities to the crash of 08, where fund managers and institutions liquidate their commodities holdings to raise cash.

What IF, and a big if, this time is different.

Looking at the long term chart of USD, its clear it has been in a secular bear market. Within a secular cycle, there will be cyclical bull markets. But overall, the long term trend is down. Focusing on the weekly charts, I saw a double top in USD. And there is a clear 5 wave impulsive structure down after the double top formed. If, USD has bottomed for wave 1, and is now retracing in a typical 50% or 61.8% of wave 1 to form wave 2, we would expect USD to crash in a nasty wave 3 after wave 2 is completed.

With a wave 2 rally in USD ongoing, equities should be on a decline at the moment. Commodities as well. Although the structure of correction defers. Equities forming a H&S (bearish) and commodities consolidating in a triangle (can be bullish or bearish depending on the direction of breakout). Which brings us to the next scenario. Most seem to think USD has truly bottomed at least for the next couple of years. What if this time, it turns out differently. Markets have a tendency to leave 80% of the people behind and wrong. So when most people agree on the same direction, its perhaps beneficial to try and step back and look at the other side.

Could both USD and equities crash at the same time ? Why not...

If the very existence of Fed itself and the monetary system comes into question, all hell will break loose. This might be the next catalyst for a crash. The world which we lived in now operates on a fiat currency system. There is no backing on Gold or any other precious metal. President Nixon removed the Gold Standard since 70s/80s. Hence, the value of our currency lies in our confidence of it. In the crash of 08, capital flew to treasuries and greenback as a flight to safety took hold. If Fed comes under scrutiny by the public and the nature of its existence is being questioned, I don't think people will still consider USD as the safehaven then. Where else will these capital flow to ?

Not in equities, not in USD nor any fiat currencies, so what else left ? Gold & Silver ?

Even if we are in a deflationary environment, it doesn't mean Gold and Silver should fall as well. If Fed manage to control inflationary pressures, gold and silver should continue to perform well if the cause of the next downfall lies in the confidence of our monetary system.

Here is Congressman Ron Paul's campaign on the auditing of Fed, HR 1207.

"I have been very pleased with the progress of my legislation, HR 1207, which calls for a complete audit of the Federal Reserve and removes many significant barriers towards transparency of our monetary system. This bill now has nearly 170 cosponsors, with support from both Republicans and Democrats. Senator Bernie Sanders has introduced a companion bill in the Senate S 604, which will hopefully begin to gain momentum as well. I am very encouraged to see so many of my colleagues in Congress stand with me for greater transparency in government.

Some have begun to push back against this bill, and I am very happy to address their concerns.

The main argument seems to be that Congressional oversight over the Fed is government interference in the free market. This argument shows a misunderstanding of what a free market really is. Fundamentally, you cannot defend the Federal Reserve and the free market at the same time. The Fed negates the very foundation of a free market by artificially manipulating the price and supply of money – the lifeblood of the economy. In a free market, interest rates, like the price of any other consumer good, are decentralized and set by the market. The only legitimate, Constitutional role of government in monetary policy is to protect the integrity of the monetary unit and defend against counterfeiters."