Sunday, February 6, 2011


It has been my contention all along that the Fed would print until something breaks. Once that break occurs we will enter the next leg down in the secular bear market. This time I don't expect it to be the credit markets, although we will almost certainly have trouble in the municipal and state bond markets. Some may even default.

I actually think the greater risk is from massive layoffs by state and local governments in an effort to cut expenses and avoid default. When that begins we will see unemployment levels start to spike again.

The real danger is going to come from inflationary pressures unleashed by the Fed's QE programs. We are already starting to see severe inflationary pressures in food and energy and it's already causing social unrest in many third world countries.
Expect this to continue and intensify as we move into the summer months.

Besides starting an inflationary spiral QE is also stretching the stock market cycles.

To explain; The `09 yearly cycle low occurred in March. The 2010 yearly cycle low should have arrived in the early spring roughly 12 months after the March `09 bottom. We did have a decent correction in early February. That should have marked the yearly cycle low. However, because of QE1 that cycle stretched into July, and was more severe that it should have been absent Fed meddling. We even witnessed another mini-crash. A direct result of the extreme complacency generated by the QE driven rally in March and April.

Under normal conditions the cycles would adjust and we would get a shortened cycle this year that should have bottomed right about now. Obviously that isn't going to happen since we don't even have a top yet.

It's now clear that QE2 is going to stretch this cycle also. I now look for the next intermediate bottom to arrive this summer sometime around July (roughly 12 months after the 2010 bottom).

This should correspond with a violent rally in the dollar index as it blasts out of the three year cycle low.

This should mark the beginning of the next leg down in the secular bear market. Confirmation will come if the correction is severe enough to test the July 2010 lows. In a healthy bull market each intermediate correction should bottom well above the prior low (higher highs and higher lows). A move down to the 1050-1000 level will be a clear sign the bull is in trouble.

We should also see the dollar rally out of the three year cycle low force the CRB down into it's 3 year cycle low (actually the cycle runs about 2 1/2 years on average).

And gold down into a severe D-wave correction. (We still have one more parabolic leg up before the D-wave starts.)

Even though I have been expecting the market to correct (into the normal yearly cycle timing band) I've been warning subscribers not to short the market because the dollar is dropping down into a major cycle low. I suspected there was the possibility the dollar collapse would stretch the cycles and make selling short very risky.

The time to short will come once the dollar puts in the three year cycle low and all markets begin the move down into the timing band for the next yearly cycle low this summer.

I will be watching for signs the dollar cycle has bottomed sometime in April or even as late as early May. At that point one might consider looking for a sector, or sectors, that are extremely stretched above the mean to sell short. (Not precious metals though. I never short a bull market.)

Until that time its still too early to play the short side. The odds are better positioning for the final leg up in gold's massive C-wave advance.


  1. Personally, I think gold could correct to the 50% fib sooner than later. Given Tunisia and Egypt, it should have taken off, but instead it went sideways, which means someone was selling hard into it. If it hits within the next couple months, would that change your forecast? Tnx!

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  3. I told subs to expect a sideways consolidation or small bull flag for a couple of days. This is usually what happens after a large rally like we had on Thursday. The fact that Friday started with another big surge higher was just too juicy for the profit takers to ignore.

    This is just how gold tends to move when coming out of an intermediate correction. Usually the move starts tentatively with each spurt higher followed by some kind of corrective behavior for a day or two.

    Towards the end of the C-wave we will see gold higher day after day often rising at a 75% to 80% clip.

    That's when we need to start thinking about an exit.

    Do yourself a favor and ignore the daily charts. Focus on the weeklies and you will see the true picture evolving.

  4. Toby,

    Calling a bottom in the dollar has been risky business. The Prechterites have been calling for a dollar rally now for quite some time! The other thing that makes it dangerous is that when the dollar rallies, sometimes gold goes up with it. So dollar rallies aren't having the deflationary impact that they once had... And what will be the big catalyst to bring the big bear back out of the mothballs? Yes, things are overbought. But there aren't too many people out there bringing up the possibility of the big "What if?". What if the way that the markets are rallying are harbingers and signs of a great global Weimar slowly bearing down on all of the countries of the world? This behavior of the markets, being detached from all sense of reality, could be indicative of a disintegration of the fiat monetary system. I also think gold is a leading indicator of this... As gold goes higher, so is everything else. It is going to get interesting soon so we'll see how it all plays out. The hyperinflation is coming.... When do you think it will be here?

  5. Good to see Gary that you realize cycles are just another tool. Since you mention the weekly chart, perhaps you have noticed that there has not been any sell signal since you turned bearish on the markets back in October. The weekly stochastic would need to go below 80 to create a sell signal. If you have noticed, not only precious metal stocks are in a bull market. Other stocks as well have risen sharply.

    Currently at 1320, I do suggest a more bearish view since all of a sudden bears give up. I do expect now a correction lasting into March

  6. Gary,
    I listen you mention at the webminar that Gold one day will enter a bubble and will burst. I have a question:
    What do you think about Gold bubble burst on the upside ?
    I am reading already many officials are talking about Gold taking some part in new world curency system as a fixed % of it. What about if price get fixed to the uper side for exampler 30-40000 $,instead going back down. I dont think this curent crise has anything to do with bubble that burst during the crise in 1980.The ammount of money that has been printed now has been more than all money printed in the history and will keep going up.In my opinion wherever Gold goes will stay there,because it really showing the reality and has to match all the funny money that has been printed.
    I will be happy to hear your opinion on that!

  7. Now that politicians worldwide have got a taste of purely fiat currency they will never go back.

    They will break the current system and then just start a new one. But I doubt we will ever see a gold backed money supply again barring a revolution by the masses.

    And even then governments have always found ways to debase the currency whether it was gold or backed by gold.

  8. Gary,I agree with you.
    .But I also think banks and goverments will try to acumulate all or most of the phisical Gold that is in private hands.In 1929 they had a confiscation of all Gold.I dont believe it will work out now.That's why I was thinking if they fix Gold at very high levels even if they are not matching all the money supply.
    This way people will return back Gold for Fiat money because of the good price.We all know how much Fiat money wort,they will defenetly losse its purchasing power over the years,but Gold is always to stay in banks.

  9. Trust me we will hear all kinds of reasons for why gold will never go down again when we get to the final bubble top.

    But just like the reasons given for why housing and tech stocks had found a permanent high it will be pure nonsense.

    Once this bull is over it will be followed by a secular bear. That one you can take to the bank.

  10. Toby,

    When the secular bear gets started in gold and silver, I hope you'll be able to make a call on buying something else or simply going back into paper money to ride off into the sunset with some paper shares of SPY, a solid technology play, etc. We'll all just camp out, cook up some hot dogs and hamburgers, and be merry. We'll be back into the dollar, I will have my money in bonds and the bank because monetary reforms happened, and I'll just be sittin pretty because I got out of everything gold\silver and avoided the secular bear. Yep. I'm looking forward to that call because I'd love to be back at the bank saving up a supply of federal reserve notes. I'd also like to buy long term treasuries with my gold profits when the 30 year yields over 30 percent. I'd love to feel comfortable with paper again. Seriously, not joking here. How far off do you think we can feel confident that gold has topped out and that it's time to cozy up to the FRN?

  11. I answered that question in the webinar.


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