-- Published: Tuesday, 15 September 2015 | Print | Disqus
By Stewart Thomson
1. Most mainstream money managers and gold analysts believe that US rate hikes are deflationary. In contrast, in the current global economic environment, I see them as inflationary.
2. I made it clear several years ago that I viewed QE as a deflationary force, and tapering as inflationary.
3. The tapering of QE laid the groundwork for a wave of reflation that rate hikes will bring to the world. Does ďMr. MarketĒ agree with me?
4. For the probable answer, please click here now. Thatís the monthly chart of the Japanese yen versus the US dollar.
5. The yen peaked in the fall of 2011, and in late 2012 my 5,15 moving average series flashed a key sell signal. That occurred just as the yen was completing a large head and shoulders top pattern.
6. Large FOREX traders tend to base a lot of their gold trades on their analysis of the yen. There are signs that the 5,15 moving average will soon flash a buy signal for the yen, and itís staged an upside breakout from a massive bull wedge pattern.
7. Whatís particularly impressive is that the yen has rallied in the face of Janet Yellenís frequent warnings about US rate hikes.
8. Gold rose alongside the yen from the late 1990s until 2011. It can rally in a similar way again, but for gold price parabola enthusiasts, thereís a much more important chart that bears watching.
9. To view it, please click here now. Thatís the St. Louis Fedís M2 money velocity chart (M2V).
10. Inflation comes from rising money velocity, and hyper-inflation comes from a hyper-rise in money velocity. In 2008 Ė 2009, M2V did turn higher, but the nature of the QE stimulus program meant that the rise was a meagre one.
11. Simply put, the Fedís QE program increased the size of the overall US money supply, but stifled its velocity. Personally, I was horrified as I watched US congress allow the Fed to run its QE program without forcing the printed money to be loaned out into the general economy.
12. Thus, any economic stimulus created by forcing interest rates lower with QE was overwhelmed by the implosion in money velocity that it also created. The QE money went to government bonds and the banks, and the banks hoarded the money rather than loaning it out.
13. I believe Janet Yellen is attempting to rectify this terrible situation, with immediate rate hikes and a reduction in the Fedís T-bond holdings. That will incentivize the banks to make loans, and put pressure on US congress to reduce its entitlement programs.
14. The size of the US government is the single biggest problem facing the US economy. The fact that the government is soaked in debt adds gasoline to the fire, but itís the overall size of government that is the main problem for the economy. The bottom line is that Americaís largest manufacturer is the US government, and the main product it manufactures is: red tape.
15. The yen is almost certainly rallying in anticipation of US rate hikes that produce an upturn in money velocity. That upturn is what will create substantial inflation in America, and do it very quickly.
16. Please click here now. Clearly, former ECB President Trichet agrees with me that the Fed doesnít need the IMF or the world bank to rain on their ďrate hikes paradeĒ. Trichet himself tried to raise rates in the past, and I think he was stonewalled by entities interested in bigger government and a smaller private sector. I donít think Janet Yellen will be so easily swayed from her plan of action, as her relentless taper to zero of QE has showed.
17. The money velocity chart has lost downside momentum, and has flat lined in the last quarter. I think the first rate hike will be followed by an enormous spree of bank lending, and that will mark the end of what is roughly a 20 year bear market in US money supply velocity.
18. Gold price parabola enthusiasts shouldnít put on their space helmets yet, but they should start watching the M2V chart more closely than the Dow and T-bonds.
19. Please click here now. Thatís the quarterly bars gold chart. On it, Iíve drawn what is arguably the worldís most important trend line. Drawing a trend line across the 1980 high of about $873 and the $1033 area of 2008 suggests that the recent decline to the $1070 area may produce a significant low.
20. When fundamentals are factored in, like the new PBOC gold buy program, the massive rise in Indian silver imports, and inflationary US rate hikes, itís clear that this trend line may carry considerable weight, not just for gold bulls, but for gold price parabola enthusiasts.
21. Please click here now. Thatís the daily gold chart. Note the superb position of my 14,7,7 Stochastics series. It peaked as gold peaked at $1170.
22. Gold looks very solid now, both in the short term and the long term, and from both a fundamental and technical perspective.
23. Please click here now. Thatís the GDXJ daily chart. Like the M2V chart, GDXJ has begun to trade sideways. Relative strength (RSI) is strong, and the 14,7,7 Stochastics series oscillator is verging on a fresh buy signal.
24. Iíll ask the Western gold community to follow Trichetís lead, and let Janet do her job. Letís watch her reverse money velocity and pressure government size with rate hikes, to begin the biggest gold stock rally of the past several years!
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Stewart Thomson is a retired Merrill Lynch broker. Stewart writes the Graceland Updates daily between 4am-7am. They are sent out around 8am-9am. The newsletter is attractively priced and the format is a unique numbered point form. Giving clarity of each point and saving valuable reading time.
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Stewart Thomson is no longer an investment advisor. The information provided by Stewart and Graceland Updates is for general information purposes only. Before taking any action on any investment, it is imperative that you consult with multiple properly licensed, experienced and qualified investment advisors and get numerous opinions before taking any action. Your minimum risk on any investment in the world is: 100% loss of all your money. You may be taking or preparing to take leveraged positions in investments and not know it, exposing yourself to unlimited risks. This is highly concerning if you are an investor in any derivatives products. There is an approx $700 trillion OTC Derivatives Iceberg with a tiny portion written off officially. The bottom line:
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-- Published: Tuesday, 15 September 2015 | E-Mail | Print | Source: GoldSeek.com