Are we approaching a moment of truth in the great battle between the natural market forces of deflation and the power of the printing press to overcome our massive debt burden with printing press money? Are Bernanke and other central bank thieves about to win out over the morality of strong work ethics and savings by destroying the currencies citizens around the globe? Will we be forced to accept ongoing theft by government thugs?
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My Inflation/Deflation Watch (IDW), which is a measure of major commodities as well as equity and bond indexes, is suggesting a very possible resolution to the upside. In other words, my IDW is suggesting we could be nearing an inflationary breakout because as of Wednesday, October 17th, at 147.90 my “watch” is right up against the downtrend line. A breakthrough would suggest we may be nearing a breakout and with that a possible runaway inflation.
But my IDW isn’t the only hint at a possible breakout. The following chart from Ian McAvity’s latest “Deliberations” newsletter shows that the broad based measure of US equities, namely the DJ Total Stock Market Index, formerly known as the Wilshire 5000, is also very close to a breakout above a long top dating back to the dot com bubble peak in 2000.
And on the following page, note the straight 1 to 1 ETF short against the S&P 500. On Oct. 18, SH closed at 33.54, just 2 cents higher than its all-time low of $33.52. A breakout here would also suggest the equity may be ready to hyperinflate. Obviously, if we are ready to breakout in stocks, we will want to give up on FAZ and other short strategies.
Alasdair Macleod wrote an excellent piece recently titled Accelerating Money Supply & Gold Prices. The green hyperbola is the lower bound, established by the Roosevelt devaluation in 1934, the failure of the London gold pool in 1968, and the end of the recent price consolidation this year. The blue hyperbola was shown on the original chart, and together they represent confirmation of the ultimate collapse of paper money.
Note that this chart is pointing in the direction of a $10,000 gold price, which is a minimum price suggested as a feasible gold price for the inevitable return to a gold-backed monetary system as argued in John Butler’s “The Golden Revolution.”
The main question for this newsletter and for investors in general is the following: will a $10,000 gold price automatically be good for gold mining profits? In my view, the price of gold by itself is irrelevant. The “real” price of gold is what really matters because if the price of gold is gaining relative to materials and labor costs, profits will rise. And here, since Lehman Brothers, that picture has been improving as you can see from the chart on your right. The bit question in my mind is that if we are about to witness a hyperinflation as the project gold price may suggest, will costs of mining rise faster than the price of gold and thus squeeze gold mining profits? This will be a very important macro economic issue that I will continue to monitor. At this stage, the picture is very good and if we get a breakout to the upside in the gold/Rogers Raw Materials ratio, gold mine profits should get even better. But if a hellish hyperinflation leads to rising commodity and labor prices that outstrip rising gold prices, the opposite figures to be true.
Jay Taylor make a newsletter editor presentation on Friday, Nov. 16, and give a expert view as as well participate in a "Bulls and Bears" keynote panel on Saturday, Nov. 17, during the San Francisco Hard Assets Investment Conference.
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