Hyperinflation and Gold
July 20, 2009
There is no
more miserable human being than one in whom nothing is
habitual but indecision, and for whom the lighting of every
cigar, the drinking of every cup, the time of rising and
going to bed every day, and the beginning of every bit of
work, are subjects of express volitional deliberation.
William James 1842-1910, American
Psychologist, Professor, Author
The current
administration promised to produce a rather lofty number of
jobs in a given period of time. To do this they were going
to stimulate the economy by focusing on the antiquated
infrastructure of the country, on developing alternative
energy supplies, etc., but just 5 months after inauguration,
the emphasis seems on what is politely called social
services but the more accurate label would be welfare.
Money is being thrown into every possible program out there
that will produce little to nothing in terms of long term
benefits and by comparison in the areas that could produce a
long lasting effect hardly any money is being allocated. We
are not going to list all the programs for they are
constantly mentioned in the news.
Based on the
number of programs that need funding and the rate at which
money is being spent, federal deficits could average a
trillion dollars a year over the next decade. The year is
not done yet and the deficit is already over 1.1 trillion
dollars. To give you and idea of just how massive these
numbers are consider that this time last year the deficit
was roughly 290 billion dollars. These projections are
based on current economic conditions and not worsening
conditions; if the outlook should deteriorate then these
projections are going to increase significantly. The
deficit in the 2009 fiscal year which ends in September is
now projected to hit 1.8 trillion dollars so we are already
off to an incredibly bad start. Last year the US government
raised 708 billion worth of new debt; this means it now has
to find buyers to purchase almost 3 times the amount of debt
it raised last year. Who is going to want to continue
dropping huge amounts of money into a currency that appears
to be headed down without strong incentives; the only
incentive that will work is higher interest rates. Sooner or
later the Feds will be forced to raise rates otherwise they
will find out that they are the only ones left at the
bidding table.
Who is going
to lend us all this money; China only has 2 trillion in
reserves and Japan about 1.4 trillion, so even if both
countries were dumb enough to lend their entire reserves
out, it would still not meet our needs. So where are we
going to get this money from? It will come from thin air,
the Feds will simply create it as they are doing right as
foreigners baulking at investing money in a country that has
no respect for its currency. Foreigners are already
demanding more and there are rumours that the Chinese have
privately renegotiated a higher rate of interest on the
money they have lent the US so far. When a nation starts
to purchase a large volume of its own debt, hyperinflation
in most cases is the next step. Just for the record the US
is not the only country guilty of printing money at a mind
boggling rate; almost every nation is now guilty of this
practise as they are desperately seek to inflate their way
out of this problem. Britain recently had its credit
rating lowered as a result of running the press in hyper
drive mode.
Even with
strong incentives to invest in the U.S. most nations are
facing their own problems so it seems almost impossible that
given this huge economic downturn the Fed's are going to be
able to find nations or individuals willing to purchase
almost 2 trillion dollars of new debt. The only other
solution is for them to monetize the debt and this is about
the worst thing a nation can do; its want third world
nations are famous for.
Thus it is of
paramount importance that individuals place a fair portion
of their money into bullion.
Gold has
violated its main up trend line and thus the odds of it
breaking through the support zone (brown line) at 925 are
rather strong. If Gold should now trade below this mark for
2 days in a row or close below it on a weekly basis, the
next target falls in the 875-900 ranges. As the main down
trend line and the top of an old channel formation (brown
line) lie very close to each, a break below both these lines
will turn a zone of strong support into a zone of very
strong resistance. Such action usually indicates that a
market is entering into a extended period of consolidation.
Some other
factors to consider
After putting
in high of 81.75 on the 16th of June, the dollar dropped to
a low of 79.56 on the 2nd of July. On the 16th of June Gold
closed at 931 and on the 2nd of July Gold closed at 930. The
very day the dollar was putting in a 2 ½ week low, Gold
instead of rallying higher responded in the same manner and
went on to in a 2 ½ week low. This type of action is not
normal, at the very least gold should have put in a 2 ½ week
high- Strike 1 for Gold.
On the 2nd of
June the Dollar put in a 9 month low and by logic Gold
should have put in a 9 month high. It closed at 964 well
below its Feb (2nd) close of 1001- strike 2
On the 17th
of March 2008, it put an intra day high of 1014 on the 2nd
of February 2009 it put in an intra day high of 1004.
Despite strong demand it was unable to trade past its old
high; strike 3
Taking all
these factors together, the picture we get is that Gold is
going to consolidate for several months before it breaks out
and puts in a series of new highs. This is actually very
good news for it will provide individuals several
opportunities to purchase Bullion at very reasonable rates.
If $875 is
taken out on strong volume for more than 4 days in a row,
then at the very least gold will pull back to the 800 ranges
and it could dip as low as 750 before it puts in a bottom.
If one looks at a 2 year chart one will notice that Gold is
trading in a rather wide channel the bottom of which falls
roughly in the 780 ranges and the top in the 990 ranges. It
is not out of the ordinary for a market to momentarily trade
below the base of a channel formation for few days before
trading above it again and vice versa (look at the green
boxes).
Conclusion
The current
pattern is projecting that Gold is going to trade in a wide
channel formation for several more months, possibly as late
as the 2nd quarter of next year, though it is more likely to
be until the 1st quarter of next year. This also coincides
with the fact that the dollar and the bond markets are
expected to rally into next year.
Gold is a
good buy at any price below 830. If you have no position in
bullion, we would strongly recommend opening up positions
over the next few months for this might be the last
opportunity you have to purchase bullion at reasonable
rates.
Most men ebb
and flow in wretchedness between the fear of death and the
hardship of life; they are unwilling to live, and yet they
do not know how to die. Seneca, 4 B.C. 65
A.D., Spanish-born Roman Statesman, philosopher
Charts
provided courtesy of
www.prophetfinance.com and
www.stockcharts.com
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