The Effects of Dollar Devaluation (Part 3)

PART 3: SHORT UPDATE AND REVIEW

Though our primary interest is in the Precious Metals Markets due to the current main driving force of Dollar Inflation to stave off the massive deflationary backdrop, we elected to start this editorial series with "something completely different" as Monty Python might say. We began Part 1 by challenging how historical charts must be viewed differently depending on whether the price action occurred in a currency inflation environment like that of today or in the 70s; or whether the price action developed in a currency-deflation environment like the 1929 era. This choice was not an accident. The choice was made to help clear the confusion caused by so many trying to relate the charts like that of the Dow, today, to the Dow chart of 1929. As we have shown, one cannot effectively compare a chart in a period of currency inflation to a chart in a period of currency deflation. This is because the currency inflation completely changes the look of the chart due to the currency being the denominator in the fraction of "Dow/ Dollar." In a chart during currency deflation like the 1929 era, "Price = Value." This is because the value of the currency is a relative constant in the denominator of the fraction, "Dow/ currency." In a period of currency inflation the value of the currency is falling so the denominator of the fraction causes the answer- price, to rise. Thus, "Price and Value Diverge" in a period of currency inflation.

In Part 1, we showed that a price chart in a period of currency inflation must have the effect of the changing value denominator, the currency, factored out to create a chart we call a "value chart"; in order to compare it to a chart from a period of currency deflation like the 1929 era. The "value chart of the Dow" in this decade shows a continuous waterfall decline from around 2000- much like the Dow chart of 1929. Based on that chart, we summarized that:

"This chart shows the correct chart to compare to the 1929 Dow where there was no effect of Dollar inflation. If one uses this chart to compare to the 1929 Dow, I think you will find that the "time cycle" matches up very closely for a bottom to occur in the current three month window of time. Since I was using monthly charts, the window may be more like 6 months. Still, the relationship is "our favorite apple dessert." We think that those using the 2007 high for the Dow are being tricked by Dollar Inflation smoke and mirrors."

You can read our full explanation in the first two Parts of our Editorial Series, linked below……………

Part 1

www.gold-eagle.com/editorials_08/goldrunner032509.html

Part 2

www.gold-eagle.com/editorials_08/goldrunner040509.html

THE RELEVANCE OF PARTS 1 AND 2

Having read Martin Armstrong's work for the first time a few months, ago, I was deeply impressed. His PDF from late in 2008 lays out what appears to be a very methodical framework for his cycle work with the general markets, and I was pleasantly surprised to see that he worked with "fractals." A reading of that PDF fully explained what his "Business Confidence Model" fully entailed. There is little doubt in my mind that he is the best "cycle analyst" through history.

Last night Jim Sinclair posted another new PDF by Mr. Armstrong. In that PDF it appears that he has moved his focus up to July for a bottom in the Dow. That date falls well within our expected window for a Dow final bottom as we had discussed using the "Dow Value Chart." Armstrong is looking for the Dow to bottom at around 4,000 or a bit lower; but we will stick with our expectations of a Dow low in a range between 5,800 and 6,000. On a percentage basis that range would match the lows for the Dow in the 70's, and it would also match the percentage drop into 1932. Though Armstrong listed some cyclical reasons for a Dow bottom in the coming time-frame, we still think the relationship between the 1929 crash and today is the best cycle comparison. Using the "Dow Value Chart" in the current period compared to the Dow Crash in the 1929 period, the relationship for a potential Dow bottom would be an almost perfect "Pi" ratio. We also believe that the Dow value chart gives a more accurate price relationship between the two periods by factoring out the differences between Dollar Inflation and Dollar Deflation in terms of price.

Though we do not follow the Dow closely, we do try to track the major movements as we do with other sectors of the market. One reason is to track the relationship of the Dow to the LT Gold Cycle since we expect the Dow to rally back near its old high before Gold peaks in this cycle in a 1:1 ratio. We discussed this in Part 2. Also, we have noted cyclical relationships between the LT Gold Chart and other market sectors. Those relationships are trading so closely that we expect a larger fractal pattern of those sectors and Gold to form, closely matching the 70's comparison. These fractal relationships are a great reference points in tracking the long-term cycle fractals for Gold and for the Precious Metals stocks. As things progress, they also will serve as potential models for investing and trading in the other sectors with increased confidence.

A new shorter-term model for Gold points toward a potential bottom in Gold in the 868 area. Today, Gold traded a bit lower to 865 so we'll have to see how this "c" leg down works out. If the model bottom comes in as expected, we'll be looking for Gold to begin a run to new highs for the move potentially into the June period.

In closing, it is always nice to review material we have presented before moving on to new material. Many people do not feel comfortable with ratio charts, but in this environment where the value of the Dollar is falling, one must understand how investments lose value by losses in the value of the currency they are denominated in. The "silent crash" ate up a lot of the value of investor's savings while those investors watch price rising. The state of the currency will be a vital issue for us as long as the volatility in their values remains high.

A NOTE ABOUT EDITORIALS

With some work and responsibilities out of the way, we expect to be moving to a subscription newsletter or investment site. It looks like I will have a friend as a partner. Anyone interested in receiving information when our site is up, feel free to send a note to the e-mail contact, below. Anybody who contacted us last year will have an e-mail notification sent to them.

Editorials like this one are meant to help define, or to "frame up" the investing climate we are in. Along with different "forward-looking" price projections, this framework is only the starting point of our investment strategy. The real nuts and bolts of investing will always lie in the work an investor does with each individual investment choice- both fundamental and technical chart-related. That includes some regular method of limiting risk, and there are many techniques to do so. Still, we feel that working hard to get a good feel for the coming investment climate, comparing the fractal considerations to past similar investment periods, and then instituting a sound and specific investment technique; will greatly increase our reward to risk probabilities. Minimizing risk while optimizing the potential for reward is about as good as it gets because "nobody knows for sure.

[email protected]

For the moment…………..Goldrunner.

Again, I'd like to thank all of the posters at the Gold-Eagle Forum for their daily input. Special thanks go to Dr. Vronsky and Westerman for creating the Gold-Eagle site and for editing my work. A very special "Congratulations" go out to Dr. Vronsky and Westerman after Gold-Eagle saw its hit counter ring up to 327 million this last week.

Here is the link to a site I use to research the warrants of Precious Metals stocks. I will be discussing some aspects of the leveraged use of warrants later in this editorial series. http://preciousmetalswarrants.com

Another very good site that is dedicated to investments in Silver belongs to David Morgan, and his site can be found here……………. www.silver-investor.com