NFTRH Interim Update 3.11.13, Addendum to NFTRH 229

Broad Market Comment

Regarding the segment in NFTRH 229 that included the chart showing the divergences between the CCI commodity index and the S&P 500, a subscriber felt I may have misspoken.  I could probably have explained it a little more clearly, but the analysis is as intended.

cci.spx
CCI (candles) and S&P 500 (shaded area)

The point was that “stocks had it right” in 2008 with respect to the coming crash across most asset classes as they topped out in 2007 while commodities continued to rise sharply right into a hard reversal and subsequent crash.  Stocks flashed the correct signal well ahead of time.

So if stocks are right again, the implication could be that the current Goldilocks backdrop could resolve into an inflationary problem before 2013 is all said and done, as commodities eventually get on the ‘right’ signal and play some catch up.

But another scenario calls into question something else that was written in #229.  It was noted that any topping out of stocks could be a drawn out affair.  But what if stocks are blowing off and making an upward spike with a hard reversal laying in wait just like commodities in 2008?  What if these asset classes (stocks and commodities) have switched roles with regard to which is ‘right’ and which is wrong this time?

Unlike many gold bugs and commodity/inflation bulls I happen to believe that deflation is a clear and always present danger due to a system’s natural need or impulse to flush out the poisons that policy makers are continually pumping.  So the problem with this week’s analysis was not the point about stocks being right or wrong in 2008; they were right.  The problem was that it did not mention the prospect of role reversal (between these asset classes), although I believe that scenario was highlighted when this chart was originally produced a couple weeks ago in #227.

Precious Metals Comment

Talk about divergence… One might call the precious metals the cutting edge of the commodity complex and their persistent weakness has implied anything but an inflation problem on the near horizon.

But with the developing structure of precious metals positioning (smart money showing rising bullishness and dumb money showing rising bearishness) we keep in mind that the prospect of deflation can be expertly used by certain entities that wish to continue a systematic inflation.  The prospect (and fear of) deflation conveniently allows the inflation regimen to continue and appear heroic, as opposed to destructive.

I try very hard to keep the tin foil hat stuff out of the analysis, but if you were to ask me if I think gold is manipulated the answer would be “hell yes; were I a powerful and unscrupulous entity with a monetary agenda I would manipulate gold to desired effect too.”

So yes, there appears to be a campaign on to discredit the inflation argument and to relegate gold to the dustbin of history as we are in a new era in policy making.  Remember the “New Economy”?  Do you remember how persistent that fantasy was and how many bears were exterminated along the way to its ultimate revelation of being just a fantasy?

“New Era In Policy Making”?  I’ll tell you what, if this repulsive little jingle somehow breaks out of biiwii land and gains traction then gold just may lose 1524 and some of the worst expectations with respect to a repeat of what happened in the mid 70’s (gold was cut in half before ultimately launching the most dynamic leg of its bull market) could engage.  Gold bugs must be aware of a potential repeat, which could take the metal to (950? 1000? 1200? 1300?) while policy makers’ are aggrandized to a galling degree before the fantasy is broken.

The paragraph above is about the worst scenario I can think of.  Not because gold could be nearly cut in half from its highs; no not at all.  But because of its chilling implications as to what kind of society we (Americans) would be living in if the above is all fantasy as is my personal belief.

But in trying to manage financial markets, we must accept all credible probabilities or even remote possibilities.  Otherwise we are not moving forward as strong and rational players.  So today we are managing a potential bottom in the precious metals complex, but we are doing so in a sober and realistic manner.

There is right and wrong (as we may perceive them) and then there is what is.  Gold and its status as real or stable money have been important to civilizations for centuries.  When juxtaposed against such history, interim phases like the scenario conjured just above are mere blips along the way.  Let’s respect the blips.  Let’s continue to manage events in a tight and controlled manner because that way we always stand a good chance to be in position to survive and capitalize no matter what lay ahead.