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Deflation Would Sink Gold

Sunday, November 4, 2012 4:50

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by Clive Maund

(The whole article is available by subscription.)

[Disclaimer: Maund is often a contrarian indicator. None theless gold's $40 drop Friday was unusual. On the other hand, the rosy job number which prompted it may turn out to be massaged & short-lived.]

Friday the dollar broke out from a completed base pattern, which was a technical event of major significance.

Fundamentally it is a sign that the festering European crisis is going to take center stage again, with a possible collapse of the euro. A strong dollar going forward is also a sign that, despite the Fed’s open-ended money pumping, another deflationary downwave is about to hit.

This is something that can only be put off, not prevented, because a collapse and implosion is the only way that the monstrous global debt overhang can be eliminated.

This deflationary downwave will probably be set in motion by collapsing demand in Europe, which is the world’s largest economic bloc, resulting from punitive austerity measures and high unemployment etc. and its knock on effect on China and the rest of the world.

Once in motion we will see the usual Pavlonian flight into US Treasuries, as most investors are creatures of habit and can’t think of a better safe haven, hence the demand for dollars to buy them. One day of course the US Treasury bubble will itself burst, which will unleash nightmarish economic conditions across the US as it is cut off for the first time from its primary source of funding.

If you want to know how the Precious Metals will fare during a deflationary downwave, you only have to look at what happened in 2008.

At such a time everything gets tossed over the side, including and especially the Precious Metals – witness what happened on Friday. This is why if such a downwave strikes soon, as looks likely, the Precious Metals can expect no reprieve. We need to be prepared for this. Could it “be different this time round”? – too many investors have ended up as bloated corpses floating downriver when they have bet on the basis of this argument, and it won’t be us trying it.

GOLD

On the 6-month chart for gold we can see that the breakout last Wednesday from the downtrend, which temporarily fooled us, was false, and we should have observed that volume was not high enough for a valid breakout.

With the benefit of hindsight we can see that a small bear Flag formed, which broke violently to the downside when the dollar staged a decisive breakout yesterday.

The huge volume on this breakdown, the highest for more than 6 weeks, was due to the sudden realization by many players, convinced up to now that the retreat was only a correction, that it’s “game over” with a dollar uptrend starting.

2012-11-04 04:42:39

Source: http://www.henrymakow.com/deflation-would-sink-gold.html

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