The Perfect Precious Metals Storm! - Part 2

THE RESPONSE OF GOLD AND SILVER TO "THE CURE"

In Part One we discussed the massive deflationary environment of the K-Winter, along with different aspects of "the cure" that the Fed has cultivated to fight off this long-term cyclical monster. Lowering interest rates, along with economic weakness, to a great degree caused the US dollar to drop in value. The printing of massive numbers of US dollars as seen in the chart of M3 created even more pressure on the value of the dollar. With the drop in value of the US Dollar, things of real value like Gold and Silver rose in value in US dollar terms. This can be easily seen in a long-term chart of $Gold as Gold's approximate 20 year correction ended, and the price started to rise.

Around the time that $Gold threatened to bust through a key resistance point on the chart, a point we have referred to in previous editorials as "Falcor's line in the sand", the Fed started to talk about rate hikes. At this time the level of the US Dollar was threatening a very key support level around the 80 mark. If the US Dollar had breached that mark, it would have likely gone into free-fall. So the Fed started talking up rate hikes, then, eventually started to raise rates in the smallest increments possible. Still, the Fed continued to print dollars at an accelerating rate, and eventually they announced that the M3 data that shows such dollar inflation would be "cloaked", or no longer available to the public.

With the continued accelerated printing of US Dollars, $Gold was not fooled, and $Gold exploded upward at a higher slope on the chart to reach a price of over $720 an ounce in May of 2006. This upward acceleration in the price rise of $Gold was confirmation that Gold had moved into an Elliot Wave advance called "Wave III", an acceleration upward of price movement. This Wave III change in the slope of Gold's rise is the next step as Gold moves toward a parabolic rise similar to the 70's historical Gold Bull Move, IMO. Silver also responded with an aggressive rise up to around the $15 dollar level.

It seems that the cure for the K-Winter backdrop of massive deflation, massive dollar inflation, is being seen even today in the accelerated price rise in $Gold and in $Silver. We have now put in the obligatory correction for the time being, with it appearing that $Gold and $Silver are ready for another fairly sharp advance in price. In fact, we would expect Gold and Silver to continue to advance with increasingly shorter corrections right up into the middle of 2008. Since Gold and Silver cyclically top later than the PM stocks as seen in the HUI Index, a top in Gold and Silver would be expected to come in sometime after our expected Wave III top for the HUI in April to May of 2008.

For the immediate time period, we would expect Gold and Silver to see a fairly sharp upward advance into May of this year, followed by about a 12 to 14 week correction. After that correction is over, the price of Gold and Silver would potentially rise for most of the rest of 2007 and early 2008 with increasingly shorter corrections in time.

US DOLLAR~ SLIP SLIDING, AWAY

In the chart, below, of the US Dollar, there can be little doubt what the direction of trend is. And after-all, why should the Dollar not be falling with the poor fundamentals of massive Dollar inflation as the Fed rapidly increases supply. The US Dollar appears to be at an important juncture at this time as a failure at the top rail of the trend channel would guarantee an acceleration in price downward at this time.

Currencies tend to be "trending markets." This means that once they start moving in a direction, that direction usually lasts for extended time periods. The reason for this is simple. The fundamentals of the currency of a nation do not change easily. For the USA the fundamentals are increasing deficits, increased spending, and Dollar inflation. What could the Fed do to reverse those fundamentals? Well, nothing I know of since the Fed is between a rock and a hard spot. They cannot raise rates at a pace higher because the stock markets and the housing market would implode. K-Winter stands with its right foot planted firmly on the neck of the Fed.

As the US Dollar has been trending lower, we can see that $Gold started trending higher. In this $Gold chart we can see that price initially started to trend higher at a lower slope until it busted through resistance at "Falcor's Line In The Sand." I believe this lower sloped rise was basically the Wave I move for $Gold.

In the $Gold chart we can clearly see a second channel with a higher slope has formed. This more aggressive angle of rise constitutes Wave III where the parabolic rise in $Gold starts to accelerate as in the chart in the 70's. I would expect this higher sloped move to last well into 2008, in fact, many times a higher sloped move will rise to an equal of the length of the lower sloped rise. We can see that the price of Gold in this chart is flirting with some angled resistance at the angled black line, but might soon make a vertical move, higher. I'd expect Gold to rise to around the 730 area, before topping in the May period between 752 and 780. After that, we might see around a 12 to 14 week correction before Gold takes off to the upside for more gains. Of course, what is to be expected given the constant need for the Fed to accelerate dollar inflation?

In this second chart of LT $Gold we see that the MACD has turned up with the ADX line also turning up to confirm the rise is a "trending move." We see a similar potential target of $780 for the May period with a range of higher targets for the May 2008 period.

Our final chart of $Gold is a "monthly close" chart of long-term duration. Thanks go out to Mr. Dan Norcini for allowing me to use his chart. In the chart we can see the 70's Gold Bull run, along with that of today. On this chart I have marked where we are, today, along with the equivalent area of today in the earlier fractal segment of the chart in the 70's. An arrow on the left shows the expected coming movement equivalent to today into 2008. I expect that spike up to take us to between $960 and $1200 in $Gold. After such a high, we'd expect a good sized corrective retracement before a long extended Wave V takes the price of $Gold into the Stratosphere. One look at this chart begs the question, "Do the nervous Nellies really want to sell their Gold, Silver, and Precious Metals stocks at these levels?"

I apologize, but I will have to include the $Silver chart in a later part of this editorial sequence. I am having a bit of a battle with Stockcharts with the Silver chart.

Until later………….when we will take a look at the HUI fractal and liquidity considerations in the fractal cycle.

Related: The Perfect Precious Metals Storm! Part 1.