Be Bullish On Inflation

By: Captain Hook | Mon, May 16, 2011
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The following is commentary that originally appeared at Treasure Chests for the benefit of subscribers on Tuesday, April 12th, 2011.


Easily the most vaunted question within financial circles at present is the inflation question - will it keep accelerating and will hyperinflation arrive eventually? For some, like Marc Fabre and James Turk, the answer to this question is easy. Inflation all the way baby - with a dollar collapse and hyperinflation in the process. And as the lights come on for increasing numbers about what the Fed is up to, exporting it's inflation to the world, this understanding will become an increasing self-fulfilling prophesy, which will surprise the heck out of just about everybody considering the still rampant denial regarding this most important issue. So, this is why one needs to be bullish on inflation, and remain bullish no matter how improbable all this seems, because this is no dream. No, it may appear surreal to most, especially in developed Western countries, but make no mistake about it - inflation and resulting price increases are just beginning to take off, where the trend should now begin to accelerate, shock, and awe.

At least this is what the charts are telling me to expect. Even for me, where I view myself as a 'savvy speculator', it's difficult to fathom the messages the charts are telling us at the moment, with the most important result in the end being a possible $ collapse directly ahead. Now it's important understand this, where I don't mean that that the $ could crash after a correction higher, which a great many speculators are actually expecting this at present. No, no, no - I mean what could happen here is the $ could begin plunging sooner rather than latter, where as per our comments last week, as far as fiat currency lifecycles are concerned, it's living on borrowed time. Oh and don't forget about Figure 2 featured in that report last week as well, you know, the one that shows the Fibonacci resonance related projection to 30. Again, it's hard to fathom a crash beginning right now after such a dramatic decline in the $ over the past six-months (and longer), but never the less it could still happen you should know, which is of course why seasoned investors always maintain strong core positions in securities that are trending in bull markets.

And in this case, that means you must have core positions in tangibles; and at core here, because they are the ultimate currencies in the group, one must have strong core positions in precious metals - physical precious metals preferably. Why physical metals and not the shares? Answer: Because precious metals are more like shares than precious metals when volatility arrives in the stock market, where for example they declined some 80% in the 2008 / 2009 debacle while gold, which should comprise core physical holdings of more conservative investors, only slid 25%. People who are looking to precious metals to preserve their wealth don't need 80% crashes along the way because they are too stressful even if they prove to be transitory. That's my view on the subject. More aggressive traders would prefer more silver and precious metals shares in their portfolios because of the leverage, where even conservative types should diversify into these areas as well; however again, percentages depend on your risk tolerances and objectives. What's more, a more conservative approach has proven wise in the first 10-years of this bull market.

But you know what, because of various factors, chief of which is continued non-participation by the investing public, the next 10-years (yes the precious metals bull market could last that long) may prove opposite, where more aggressive portfolios excel. This certainly has been the case regarding silver over the past year, where its performance has quadrupled that of gold. Concerning the shares, and in referring back to a piece I did on this subject last month, all we need to see is that rectangle currently housing the trade in the GDXJ / GDX Ratio broken to the upside and one will have a profound signal in this regard, where the same kind of price action in all the precious metals share to precious metals ratios (ex. HUI / Gold Ratio) would act as confirmation the move is for real. And as alluded to above, this is in fact exactly what I expect to happen starting later this year as more and more people wake up to what is happening out there - the inflation - precious metals - everything. First though, and allowing for further limited upside over the next six weeks (into May - sell in May and go away), in all likelihood the $ will have the cyclical / counter-trend rally discussed last week over the summer and into fall. Then, the fun will begin.

Now that's the popular view of what to expect moving forward right now - a predictable scenario based on logic, limited evidence, etc. But upon deeper investigation of the issue we find other empirical evidence in the charts that suggest precious metals (and hence the inflation trade) might need to be held closer than ever directly ahead, which likely feels counter intuitive to most at present. This is why we watch the charts closely, to avoid making the mistakes of others based on a false belief or being ill informed. If you are an active speculator, such mistakes can prove very expensive. As an example, just take a gander at the chart below and realize that if RSI breaks out to the upside in coming days we will have a fresh buy signal in the inflation trade, which as you know would be led by precious metals. (See Figure 1)

Figure 1

And just look at how far the above relationship (Gold / Dow Ratio) has to move. It still has the lion's share of its larger advance to match the 1980 high to go, where it's all coiled up above key support, possibly ready to surge again. That's the picture here in this very important ratio right now. The picture is telling you precious metals are still cheap and potentially poised to make an immediate advance if not in nominal terms, in real terms against stocks, which means the inflation trade is alive and well. So, we could have nominal price declines in both stocks (as measure by the all important and heavily manipulated Dow) and gold with the latter exhibiting better capital retention in signaling any such declines would be transitory, which is the same message being thrown off by the Dow / CRB Ratio by the way, one of the buy signal remaining on the inflation trade as it continues to decline. (See Figure 2)

Figure 2

Again however, please remember this does not mean nominal prices must decline, specifically in the case of precious metals, and especially if stocks don't decline. And in what may continue to shock the masses, stocks may indeed remain buoyant longer than most speculators can remain solvent if this following chart has any predictive power, that being the S&P 500 (SPX) / CBOE Volatility Index (VIX) Ratio, where if present strength persists, a double top is possible in the not too distant future at this pace. (i.e. this is an inflation induced manic move.) This would definitely wake a few people up, most notably deflationists who fail to realize just how crazy and desperate those in charge of the public trust have become. (See Figure 3)

Figure 3

What's more, a double top does not appear capable of stopping the advance in the NASDAQ Composite (COMPQ) / Volatility Index (VXN) Ratio, which looks set to break through double top resistance on it's way to the Fibonacci resonance related target at approximately 250. Maybe now disbelievers are getting the picture too, where again, if the $ keeps falling, the US$ pricing of all commodities will continue rising, which includes stocks given they are now simply a function of inflation. And make no mistake about it, the US government needs rising inflation (money printing) to pay for its increasing expenditures, where no 'leeway' or slack within this process is now possible without fiscal collapse. (See Figure 4)

Figure 4

So you see, acceleration of money printing in the States will not happen voluntarily. Only the markets can stop this, and based on the charts both above and below we are getting increasing signals that allowing for relatively minor corrections like we have had over the past few days, higher asset / commodity prices should be anticipated, at least until the bond market(s) fall apart for real. This is certainly what Bill Gross is expecting in being net short Treasuries for the first time in his flagship fixed income fund's history. Can you blame him? The US had to come up with over a trillion $'s in March between its budget deficits, tax refunds, monetizations, you name it, which is why the $ keeps on falling, and may crash if the pressures keep rising. (See Figure 5)

Figure 5

The only thing that would suggest gold will not reach Fibonacci resonance related resistance at approximately $1525 (see above) this run is if the $ can close above 75.50. It must close above this level to signal the move lower is over in the intermediate term. If it cannot do that, then gold could blow through this resistance ($1525 to $1535) and start pulling away from the channel indicated on the weekly plot below. Such a move would most likely be parabolic, which would correspond to a crash in the $. Of course nobody knows if this is going to happen, however such an outcome is not as unlikely as it was last month; and, if the US keeps conjuring up increasing quantities of unsubstantiated currency this month, it would be more likely again. (See Figure 6)

Figure 6

Thus, the story continues to unfold in surprising fashion to most, where at each extreme, from the educated to the naïve, sensibilities are assaulted on a daily basis. So don't attempt to fight what's going on here, simply position for it with a bias towards the inflation trade given the evidence above, where even if there is a nominal scale correction looming, you should know that eventually your positions will be found to be on the right side of the larger trade.

This is why we say, 'be bullish on inflation'.

And of course, good investing all.



Captain Hook

Author: Captain Hook

Captain Hook

Treasure Chests is a market timing service specializing in value-based position trading in the precious metals and equity markets with an orientation geared to identifying intermediate-term swing trading opportunities. Specific opportunities are identified utilizing a combination of fundamental, technical, and inter-market analysis. This style of investing has proven very successful for wealthy and sophisticated investors, as it reduces risk and enhances returns when the methodology is applied effectively. Those interested in discovering more about how the strategies described above can enhance your wealth should visit our web site at Treasure Chests.

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