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Inflation, Deflation - A Mexican Standoff

Commodities / Gold & Silver Jan 07, 2008 - 12:54 PM GMT

By: Captain_Hook

Commodities The inflation and deflation camps are now at completely opposite ends of the spectrum – each staring the other down in a Mexican Standoff of sorts. In this regard it's not uncommon to find articles telling us why inflation is the big concern right along side others that provide lucid arguments as to why 1929 is just around the corner. And as noted in our alert yesterday , not since the year 2000 have we witnessed such complacency in the trade considering what's happening out there, where if this keeps up at some point the equity complex will just snap-off one morning with big down days over seas leading the way. Of course on the flip-side of this, and as Dave pointed out the other day , history has proven that shorting technical set-ups like we have right now has proven expensive for the bears, and that most should abstain from shorting stocks. So, the 64 trillion dollar question arises, ‘who is right?'

The following is an excerpt from commentary that originally appeared at Treasure Chests for the benefit of subscribers on.

You would be amazed at the people who send us emails thinking we have the categorically correct answer to this question. In this regard I would just like to remind you what we are doing here is as much art as science, and that it's opinion not fact. What's more, if you think investing is an exercise in dealing with absolutes, and that proper portfolio / trading disciplines need not be followed, perhaps it would be a good idea for you to get a hold of a doctor expert in prescribing meds, because you will likely need them at some point. Here, anybody who has been at this game for a while should realize proper portfolio planning / trading strategies require constant monitoring for fidelity, especially in periods potentially characterized by rapid change due to smoke and mirrors conditions in a market place.

And that's exactly what we have today thanks to our moniker price managers that continue to manage the system to their own personal benefit. Now, economic imbalances and strains are so profound that under the right conditions financial markets could snap and / or cease to function, which is already the case within inter-bank markets, where we basically have a situation of the thieves rightfully not trusting each other. This of course brings to light a high degree of irony in the big picture considering the degree of trust the public still has for the banking community. Oh yes – I remember now – it's not that. No – I remember now – the public is either sleeping and / or brain dead. How could I have forgotten this?

Anywho – that's my rant for the day. Now it's time to get down to business. With respect to the stock market, and in qualifying the totality of comments made on this site with respect to our views regarding the future price movements in the broad stock market, while it may be true stocks could get squeezed higher from here, this does not mean a great deal of risk does not exist, and that precautions should be taken within your portfolios. In this regard yesterday's alert was a warning within this spirit and nothing more, where in previous instances such as this since 2003 a bunch of bearish speculators / hedgers show up on the scene and send short and put / call ratios right back up again, along with the stock market. And if they show up again over the next few days, we of course will not be surprised because there is technical evidence provided by Dave the other day (the positive reversal ) on the daily S&P 500 (SPX) plot suggestive a run to new highs is quite possible. Lest we forget the same technical set-up appeared in the TNX during summer however, which of course failed well before the measured move was traced out. As this understanding pertains to the stock market then, there is definitely no guarantee the SPX is on its way to 1612 (the measured move), and that unless some short sellers / hedgers show up very soon, stock markets will most likely continue to remain volatile, at a minimum.

Further to this, and why I am softening my view on just how fast stocks are destined to decline into the future, you should know that we are currently in the vicinity of options related floor pricing for all the US indexes. This means that even though open interest is declining, which is bearish and can supersede floor-pricing concerns, as options expiry approaches next week prices should get squeezed back up to current proximities if history is a good guide. If this does not occur, and especially if accompanied by low volumes over Christmas, January could be a very interesting month to say the least. As an aside, I still don't know what to make of the triangle / diamond in Goldman's chart (see Figure 4 ) other than they plan to squeeze stocks higher under the cover of low volumes over Christmas holidays in justifying their bonuses. Here, we still need to see that final lesser Degree 5 th wave traced out; so again, expect the unexpected, at least until January arrives and the truth of more normal volumes drive pricing once again.

On to the precious metals markets now, where a Mexican Standoff of its own is currently being duked out, with not only the large round number at 400 [think Progressive Interval System (PI) ] on the Amex Gold Bugs Index (HUI) in play in this regard, but also $800 on gold, and $14 in silver. As for HUI technicals, they don't look bad at all, especially on the weekly shown below, where if one did not know the specter of a deflation scare could be directly upon us, you would think just a garden-variety correction was in the works. Of course prices do need hold current levels, where in looking at this plot, it would not be a good thing to see HUI prices travel too far away from the large round number at 400, as this would violate important Fibonacci resonance related support, and call into question the bull market in precious metals based on the preferred count at present. (See Figure 1)

Figure 1

And in bringing into the picture another significant technical consideration for the HUI, it just so happens that on top of being a large round number and important Fibonacci related support, the 400 metric also represent long-term trend line support, where without a doubt a trip down to 375 (daily trend definer and a 25-point interval a la our PI), and then 360 (200 MA) will not be much fun if one is long. As it stands today, given what I know about what's happening in the backdrop, and given gold will undoubtedly be the world's future reserve currency, meaning demand will go off the current scale at some point, in the meantime this does not mean a liquidity related event can't come along to scare the begeezes out of everybody. This means that if general price levels begin to decline in earnest, both gold, (and especially) silver would likely go along for the ride. Hence, precious metals shares would fall as well, with the big question being extent of course. (See Figure 2)

Figure 2

Apologies for not presenting the timeline analysis of the HUI discussed yesterday, but in already knowing we have a two-week correction window ahead of us if history is a good guide, upon review of a broad range of charts it quickly became apparent the ‘big picture' charts presented above were more important, so the time was spent on them. In summing up our current view on what the HUI is up to here then, it's most likely on its way down to test moving averages in the 360 to 375 area in coming days. Let's hope support holds no?

Unfortunately we cannot carry on past this point, as the remainder of this analysis is reserved for our subscribers. However, if the above is an indication of the type of analysis you are looking for, we invite you to visit our newly improved web site and discover more about how our service can help you in not only this regard, but on higher level aid you in achieving your financial goals. For your information, our newly reconstructed site includes such improvements as automated subscriptions, improvements to trend identifying / professionally annotated charts ,   to the more detailed quote pages exclusively designed for independent investors who like to stay on top of things. Here, in addition to improving our advisory service, our aim is to also provide a resource center, one where you have access to well presented ‘key' information concerning the markets we cover.

On top of this, and in relation to identifying value based opportunities in the energy, base metals, and precious metals sectors, all of which should benefit handsomely as increasing numbers of investors recognize their present investments are not keeping pace with actual inflation, we are currently covering 68 stocks (and growing) within our portfolios . This is yet another good reason to drop by and check us out.

And if you have any questions, comments, or criticisms regarding the above, please feel free to drop us a line . We very much enjoy hearing from you on these matters.

Good investing in 2008 all.

Captain Hook

By 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

Disclaimer: The above is a matter of opinion and is not intended as investment advice. Information and analysis above are derived from sources and utilizing methods believed reliable, but we cannot accept responsibility for any trading losses you may incur as a result of this analysis. Comments within the text should not be construed as specific recommendations to buy or sell securities. Individuals should consult with their broker and personal financial advisors before engaging in any trading activities, as we are not registered brokers or advisors. Certain statements included herein may constitute "forward-looking statements" with the meaning of certain securities legislative measures. Such forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause the actual results, performance or achievements of the above mentioned companies, and / or industry results, to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Do your own due diligence.

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