Of course the gold conspiracy theory crowd has no problem with this kind of thinking, pointing to what appear to be overwhelming positives for the market that will need be dealt with deflation or not. As you can see in the attached directly above, Adrian Douglas takes great pleasure in reminding us gold should be trading well over double what it is now just to match the fraudulent inflation measures (CPI, PPI, etc.) price managers use to support the paper markets, and that for this reason, it could make a catch-up move when the jig is up. The question then returns to, is this move on the part of the Chinese big enough to end the dance, leaving a great deal of musical chair participants with no place to run. A jump to $1500 in coming months would increase possibilities in this regard considerably; as such a move  (far past the $1,000 mark into four-figure territory) would be suggestive of further gains after consolidation. (See Figure 2)

There are many other ways to look at both gold and the $ at present however, with the administration’s lame-brained policy to keep driving the $ lower at all costs to cure the collapsing economy high on the radar right now because the buck needs a break. That is to say even if the $ is doomed, because it has been driven lower relentlessly since March, it could use a correction higher, to say the least. What’s more, the longer it’s driven lower without a correction, the greater the odds that when it finally comes it could be significant, signaling important tops in stocks, commodities, and even precious metals initially. This is of course the risk associated with being heavily involved in precious metals right now on a trading basis. Bullion holders do not have the same concerns, but the traders / speculators don’t want to see a Comex related sell-off start anytime soon. Instead, they want to see gold finish 3% above $1,000 ($1030) for two days in a row to trigger a buy signal. (See Figure 3)

As you can see above, the monthly chart shows the significance of such a development well, where like the Fibonacci grid displayed on the weekly, it shows a breakout above $1030 would be important in nature (this is an important observation) considering the tight resonance configurations present in both cases, materially improving the bullish case. Moreover, the fact the base / consolidation pattern / inverse head and shoulders pattern is a significant structure, taking some 17-months to construct, this also points to the probability the move should have some staying power, as well. So, the $ could be driven lower because of this, or possibly by design as price managers see allowing gold to rise as the only means of keeping it falling. Equities must be kept buoyant through seasonal weakness you see – no crashes like last allowed. This could be very good for precious metals shares if stocks remain buoyant throughout the fall, which will be explained in greater detail below. (See Figure 4)

The logic here is higher gold means inflation is alive and well, which means stocks should go up to people who don’t keep track of the real reasons precious metals could be rising as a result of at present. (i.e. because of speculation and manipulation, not inflation.) Still, as you can see above, precious metals shares, as measured by the Amex Gold Bugs Index (HUI), have re-entered the long-term growth channel and have plenty of room in the indicators for further gains. The shares are leading the metals while silver is leading gold, so from a staying power perspective, the rally looks suspect for those who think stocks are in jeopardy this fall. As mentioned above however, if gold can close above $1030 for two days running a powerful buy signal will be triggered, likely thwarting the hypothesis stocks will swoon this fall. (See Figure 5)

Of course if this rally is for real it would help if the Philadelphia Gold and Silver Index (XAU) could make further progress up into it’s growth channel, reducing the risk of this being a robust test of the break last year. Supporting the thought process such a move is possible is the fact unlike the HUI, which is showing the potential for a time line top at present (one would assume it would be a top as this has been the most frequent case during the bull market), the XAU will not hit a time line turn for several months yet, leaving open the possibility of a move higher throughout the fall. Such a scenario may not appear likely right now; however again, if gold can close above $1030 for two consecutive days, anything is possible. Moreover, in terms of the weekly XAU plot shown above, one should notice not only are indicators not overbought; but more, RSI just completed a successful test off a diamond that was some 15-years in the making. Again, this is suggestive of staying power in the move. (See Figure 6)

When we move on to the monthly however, the technicals don’t look anywhere near as good as is the case with the weekly, with particular attention to RSI structural resistance, however if this hurdle could be overcome, the other indictors show the potential for further strength as well. That being said, as with all monthly charts in the sector, it should be noted Bollinger Band (BB) widths have likely topped and are essentially just beginning to contract, which goes along with Robert Prechter’s thoughts on what to expect moving forward. Here, what would happen is the $ would begin to rally in earnest, bringing down stocks, commodities, and precious metals of all varieties, with the shares leading. So, it’s important we see gold close above $1030 soon if this is to be avoided sooner than later (it will likely happen next year no matter what happens now), along with gold to gold stock ratios remaining strong. Here again, technicals associated with the weekly HUI / Gold Ratio appear to have a bullish predisposition. (See Figure 7)

As you can see above, here again the weekly has an RSI diamond present that appears to have just completed a successful test that should produce further upside. What’s more, one should take not of a possible Elliott Wave count that project prices higher, along with the Fibonacci resonance related target that can be projected. Like the HUI itself however, an potentially important time line turn is also set to arrive any day now, and in terms of the bull market thus far such events have historically been negative. Frankly, short of a bout of hyperinflation at this time, in knowing what the prognosis is for the credit cycle (it’s heading down for sure) it’s difficult imagining this turn being bullish on a lasting basis, however a shorter lived rally into fall that fails at only marginally higher prices is not difficult to conjure for anybody, with the reasoning behind such a move being the product of the China factor (causing commercial short covering and spreculative blow-off) set against a deflationary backdrop. (See Figure 8)

And it’s important to know we live in a world of dualities in this regard right now, with numerous macro factors (deleveraging / credit implosion, demographics, global overcapacity) bringing on deflation set against a protective bureaucracy bound and determined to continue the gravy train for as long as possible strategically inflating what they consider necessary without tipping the balance in favor of hyperinflation. This is why I like Prechter’s view on how the larger sequence should unfold because for whatever reason up until this point the inflation measures authorities have implemented appear to be insufficient to maintain a lasting hyperinflationary sequence. Moreover, I think he is right in saying this is not the will of the people yet because they are not scared enough, but that this might change down the road once a view over the cliff becomes clearer. Of course the monthly HUI / Gold Ratio plot displayed above is saying ‘think what you want, if RSI joins the other indicators with a breakout, only a fool would bet against a continued positive resolution from a technical perspective. (See Figure 9)

Reinforcing this same sentient we have the Amex Gold Miners Index (GDM) / Gold Ratio above with the same technical set-up essentially, showing that if prices can break back above structural resistance, RSI will break out higher, opening Pandora’s Box from a technical perspective. Here, no matter how much it rubbed the logical man the wrong way, he would be compelled to contemplate a more bullish / higher prices outcome directly ahead, where it’s important to understand it’s not inflation per say that would enable such a move, but the lack of respect for gold and manipulation / suppression of its price all these years that finally gets corrected. Can a commercial short squeeze accomplish this? I honestly cannot answer this question, however I can tell you one thing – you want to own gold and you want to own it in the most secure fashion possible, meaning physical bullion, close-end fund (think Central Fund Of Canada), or reputable e-account (Goldismoney.com). (See Figure 10)

To finish up this exercise this morning, I draw your attention to the chart above, which is the monthly XAU / Gold Ratio. In taking a look at this chart you will notice that unlike Figures 8 and 9, not only do stochastic influences appear more favoravble with a recent breakout, RSI has also already broken out to the upside, suggestive a big move is about to unfold. So, I would not second guess this, as in total, I am sure you will agree based on the above analysis, both technicals and fundamentals (if you can call a commercial short squeeze a fundamental) support further gains across the sector.

And the stock market appears ready to continue its seasonal inversion, so again, I would not bet against the least anticipated outcome this fall, that being equity strength across the board. Another factor suggestive pressure in the pipe will remain strong through the fall is found in the bullish appearance of the TNX chart, where it’s difficult imagining interest rates heading higher if equities are in the tank. Now I know the stock market and gold will head separate directions at some point, and who knows, such an outcome could happen as we head into next year as the decade rolls over. Manias tend to extend into the first year of a new decade, witness the NASDAQ in 2000 under similar (stressed) conditions, so again, as unlikely as such an outcome would appear to a deflationist, don’t forget markets are designed to fool the greatest number of participants, and that these are extraordinary times.

See you on Thursday with more potentially bullish precious metals charts from the Chart Room showing you why a precious metals mania may finally be here.