Money Supply, the Dollar, and Silver

By: Robert McHugh | Sun, Jan 29, 2006
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Having just pumped a quarter of a trillion fiat dollars over the past three months, and with the stock market's flight back on track, and with that notorious gig buster, M-3, soon to share space under a glass counter at the Smithsonian, next to buggy whips and dial phones, the Fed can afford to take a credibility break. M-3 was reported to be up only $2.0 billion last week. Of course it is up $96.7 billion over the past month, a 12.4 percent annualized rate of growth, is up $139.6 billion over the past two months for an 8.97 percent (8 times Friday's reported GDP) rate of growth, and is up $209.3 billion over the past ten weeks, a 10.8 percent annualized rate of growth. So the silver-domed, soft-bellied men who sit around the big mahogany table in the ivory tower exchanging multi-syllable words not found in the Oxford Thesaurus, should be applauded for their newfound restraint.

Oh, darn, I just peeked at the non-seasonally adjusted figures, the raw M-3 numbers. Gosh, it seems M-3 was up $18.4 billion last week. And over the past twelve weeks? Up $271 billion, on a pace to grow money over a trillion dollars this year - and that's with the accountability of a reported M-3 figure. Scratch the accolades. It appears that the mild growth for one week might have more to do with the "adjustment" and in fact they did announce a change to the adjustment formula this week. It looks like they have started using the X-12-ARIMA procedure to calculate the seasonal adjustment. Well, by golly, that worked quite well, wouldn't ya say, ole chap?

The U.S. Dollar completed its second wave A up and second B down of a Double Flat/Zigzag corrective intermediate-term rally. The final wave C to a corrective Primary wave (2) top is next, and may have started.

We can estimate the timing of the start of the Dollar's coming collapse into the 60s (probably even lower) by doubling the time the first A-B-C (a Flat 3-3-5 pattern) took for corrective Primary degree wave (2) up. From the time the U.S. Dollar's Primary (1) bottomed on December 31st at 80.39, to the time the first of what will be two A-B-C patterns topped at C on July 8th at 90.77, was about seven months. Then the dividing wave, X, took the Dollar down to 86.02 on September 2nd. That timing says the start of the decline should arrive coincident with the March/April period when M-3 is hidden and Iran starts selling oil on its bourse in euros.

There is an alternate EW labeling for the Dollar, mostly out of respect for the Head & Shoulders Top that has formed. That alternate suggests the top is in and the decline is underway. The decline is choppy, with overlapping waves, so if the Dollar has topped, then we likely have seen two degrees of waves one down and two up, with a pair of small degree threes down coming next. Our leaning is that the Dollar probably has more upside left and the top count is transpiring.

Silver hit our 9.75 target Friday, reaching 9.78 intraday. We pointed out this target back when Silver was in the 6.00's last summer. Silver has achieved the price target from the Symmetrical Triangle, where it thrust the same distance as the widest portion of the triangle. This means the risk of correction has increased substantially at this time. Traders need to think about this risk when staring at recent profits. Long-term holders need to stock up the antacids should the next multi-month buying opportunity kick off soon.

Our top Elliott Wave count shown above suggests a small decline is due, Minor degree wave 4, to be followed by the final rally to a wave (1) top. However, be mindful that the last wave of a long move can truncate, so wave 5 up does not have to better Friday's levels. Might Silver hit 10.00? Sure, but the risks are greater here to capture that last 5 to 10 percent than during the past several months.

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"Or do you not know that the unrighteous shall not
inherit the kingdom of God? Do not be deceived; neither fornicators,
nor idolaters, nor adulterers, nor effeminate, nor homosexuals,
nor thieves, nor the covetous, nor drunkards, nor revilers,
nor swindlers, shall inherit the kingdom of God.
And such were some of you; but you were washed,
but you were sanctified, but you were justified
in the name of the Lord Jesus Christ, and in the Spirit of our God."

I Corinthians 6:9-11


Robert McHugh

Author: Robert McHugh

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

Robert McHugh

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 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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