Hyperinflation and Gold

By: Sol Palha | Mon, Jul 20, 2009
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"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).


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



Sol Palha

Author: Sol Palha

Sol Palha

Sol Palha is a market analyst and educator who uses Mass Psychology, Technical Analysis and Esoteric Cycles to keep you on the right side of the market. He and his partners are on the web at www.tacticalinvestor.com.

The information contained herein is deemed reliable but no guarantee is made about its completeness or accuracy. The reader accepts this information on the condition that errors or omissions shall not be made the basis for any claim, demand or cause for action. Any statements non-factual in nature constitute only current opinions, which are subject to change. The author/publisher may or may not have a position in the securities and/or options relating thereto, & may make purchases and/or sales of these securities relating thereto from time to time in the open market or otherwise. Neither the information, nor opinions expressed, shall be construed as a solicitation to buy or sell any stock, futures or options contract mentioned herein. The author/publisher of this letter is not a qualified financial advisor & is not acting as such in this publication. Investors are urged to obtain the advice of a qualified financial & investment advisor before entering any financial transaction.

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