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April 02, 2006

Gold Understands the Fed's Profligacy
by Robert McHugh

There has been a rumor floating around the internet the past few days, suggesting the Fed is busy printing $2.0 trillion. I probably had 200 subscribers email it to me. Thanks. I don't know if that is remotely true or not, but precious metals are certainly behaving as if it is. The thrust up we have been waiting for in Gold has started, Gold catapulting $23.00 this week to $583.00. Silver has also done nicely, and has now gone parabolic. The problem with parabolic spikes is that all bets are off as to where the top comes in. The ascension becomes vertical until exhaustion, then a dramatic decline usually follows. Silver was up 0.77 this week to close at 11.50. Oil is rising sharply, up $2.60 a barrel to 66.86. These are inflation assets. It suggests a surge in inflation is coming, a surge in the kidnapped M-3 figure no doubt. U.S. Bonds agree, dropping like someone glued them to rocks and tossed them off a high rise, down two points this week to close Friday to 109^06. None of the above surprises us, as the charts have all suggested this was coming for a while now. It is just that, once it comes, it still takes your breath away.

The HUI Amex Gold Bugs index is in a third wave up of a first wave of a third wave up, and we can really see the power of third waves. Quite a sight to behold. The HUI rose 22.30 points this week, or 7 percent, to close at 336.32. Both key trend-finder indicators for the HUI remain on a "buy" signal Friday, the 30 day Stochastic rising to 100.00, above the Slow at 68.52. The HUI Purchasing Power Indicator rose to 221.74, a new high for the rally, and its "buy" remains intact. Since the HUI PPI indicator generated a "buy" after the close of business on March 14th, 2006, the HUI has risen 45 points, or 15 percent. Since the HUI 30 day Stochastic registered a "buy" signal on March 24th, 2006 the HUI has risen 31 points, or 9.8 percent.

That's the overview. Now lets take a look at the details. We have new very Bullish developments in Gold this week. The recent correction is over, given the sharp thrust higher this past week. What this means is the correction was too short as far as time is concerned, and therefore is not a large degree, Intermediate degree wave 4. The rule of proportionality demands we label the correction a smaller degree retrace, which means there is a great deal more upside coming sooner than a larger degree labeling would allow.

We now can clearly see this was a small degree correction -- and it is over. Wave fives tend to extend in precious metals, and we now have two degrees of wave fives happening at the same time. The new labeling considers the recent correction as a Minuette degree wave iv, a Flat 3-down, 3-up, 5- down pattern. Underway is a Minuette wave v of a Minor degree wave 5 -- but still within the Intermediate wave 3 up. This is all very exciting for Gold bugs. We have a long way to go on the upside before a multi-month decline, the Intermediate degree wave 4, hits. The recent moves are shown on the next page in a close-up shot of the waves. We count a Sub-micro degree wave {1} up, {2} down complete, and {3} up underway. This is just forming the first of an eventual five waves of Micro degree in process. I don't want to get crazy here in a projection, but based upon proportionality, Gold should be headed for $800 an ounce before the Intermediate wave 3 up completes and a multi-month correction begins.

Here's a fascinating stat: Since the Fed announced it would hide the M-3 number, Gold has risen $123.11 or 26.4 percent. Since the Fed has actually stopped reporting M-3 two weeks ago, Gold has risen $39, or 7.1 percent. Gold understands the nonsense going on at the Fed. Of course, M3 has been kidnapped by the Federal Reserve, an institution that has forgotten that this great nation, America, is of the people, by the people, and for the people. The Fed has forgotten that it is a public servant, not the king, and is accountable to We, the people as our U.S. Constitution says in its first three words. The purpose of a Constitution is that it lays out the laws that government, in its servant position, must follow. Our government is subservient to the people, not the other way around, which makes America different, and makes America great. When government-appointed institutions, like the Federal Reserve, decide to hide their activities from public scrutiny, nothing good can come of it.

On March 7th, United States Congressman Dr. Ron Paul, introduced House Resolution 4892, in the 109th Congress, 2nd session. Cosponsoring the bill was Congressman Walter Jones of North Carolina. This bill would require the Board of Governors of the Federal Reserve System to continue to make available to the public on a weekly basis information on the measure of the M3 monetary aggregate, and its components, and for other purposes.

Please contact your congressional representative and ask her or him to vote For H.R. 4892. This is critical if We the people are going to be able to hold the Federal Reserve accountable for its profligate monetary actions. You can simply do a Google search, loading your Representative by name, and an email button will come up. If you load in the word "Congressman" or "Senator," you will be taken to a window where you can find your representative. This is critical if we are to protect the concept of free markets in America.

Silver has gone parabolic, meaning crazy, rising vertically. The problem with parabolic spikes is we don't know where they will stop. Obviously Silver sees monetary hyperinflation. Silver has a past with parabolic spikes, but in each instance we got a sharp vertical correction, and then another push higher. If it decides to top here, a .382 retrace for wave 2 down would take Silver to 9.92ish. But that would just be a wave 2 bottom, meaning -- like Gold -- Silver has much further upside. Silver is in its Intermediate degree wave 5 up, and as we said earlier, wave fives extend. The rule of proportionality argues that Silver is not finishing its wave 5 up, for that wave would be far too small in relation to wave 3 logarithmically. We can keep that scenario in mind as an alternate count, but we do not expect that. After Silver corrects into its Minor degree 2 bottom -- which should be sharp and scare off a lot of Silver holders, it should be headed for $20 an ounce. That is based upon the fact that a Minor degree wave 5 of Intermediate degree 5 is due before the top of Primary degree (1) and the start of a multi-month decline.

Oil. We believe the odds favor higher oil prices over the next several months, maybe year. We come to this conclusion because it is looking like a broad Symmetrical Triangle is completing in oil. We know that most Symmetrical Triangles are wave fours (or wave b's), and suggest a continuation of the prior trend once they are complete. In oil's case, the prior trend was up, therefore the breakout from this Symmetrical Triangle should also be up, an Intermediate degree wave 5 to a primary wave (1) top.

This week's rally eliminated the Bearish Head & Shoulders alternate possibility, so its off to the races for the HUI Amex Gold Bugs. The HUI has just started an Intermediate degree wave 3 up of a primary degree (3) up, and it should be something to behold. It won't be straight up, and there will be sell-offs that test the resolve of Bulls, but this baby is going higher -- a lot higher. We do not recommend trading off of Elliott Wave counts, but prefer our Stochastic and Purchasing Power Signals for the best guidance.

(Charts are courtesy www.stockcharts.com.)

Bottom Line: The TA picture continues to deteriorate. Interest rates continue to rise, which should wreak havoc on debt-ridden consumers. Stocks should decline with Bonds and the Dollar. Who knows what shenanigans the Fed is up to with direct liquidity interventions. This is like warm air meeting cold air in the atmosphere. It doesn't equal one or the other. It equals a storm. It means precious metals are headed much higher. Caution is warranted.

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"I sought the Lord and He answered me,
And delivered me from all my fears."
Psalm 34:4

Robert D. McHugh, Jr. Ph.D.
Main Line Investors, Inc.

Robert McHugh Ph.D. is President and CEO of Main Line Investors, Inc., a registered investment advisor in the Commonwealth of Pennsylvania, and can be reached at www.technicalindicatorindex.com. The statements, opinions and analyses presented in this newsletter are provided as a general information and education service only. Opinions, estimates and probabilities expressed herein constitute the judgment of the author as of the date indicated and are subject to change without notice. Nothing contained in this newsletter is intended to be, nor shall it be construed as, investment advice, nor is it to be relied upon in making any investment or other decision. Prior to making any investment decision, you are advised to consult with your broker, investment advisor or other appropriate tax or financial professional to determine the suitability of any investment. Neither Main Line Investors, Inc. nor Robert D. McHugh, Jr., Ph.D. Editor shall be responsible or have any liability for investment decisions based upon, or the results obtained from, the information provided.

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