DAILY REPORT
(06/03/09)
I want to start right out with gold and the US dollar because they are moving in opposite directions for the same reason. For the last couple of days the Treasury Secretary, Tim Geithner, has been in China trying to sooth some ruffled feathers. The Chinese are upset that their trillion dollars of US reserves are worth a little less every day and have threatened to dump them all on the market regardless of the consequences. The Chinese culture is quite different from the western culture, and I suspect this is not an empty threat. Rumor has it they told him to bring some hard numbers and if that is the case, Mr. Geithner is between a rock and a hard place. He gave a speech at a Chinese University saying that the US wanted a strong dollar and the worst was over. Apparently the students laughed at him.
I have watched Mr. Geithner testifying before Congressional committees on a number of occasions, and I have learned three things:
He'll thank you profusely for the wonderful job you're doing and praise you for making things better.
He will never look straight at you when he answers a question. He cocks his head sideways and looks at you out of the corner of his eye (I hate that).
He never ever gives you a straight answer; in fact the answer he provides usually has another zip code.
As you can tell I am not a fan of Mr. Geithner and I don't think his snake oil salesman type of approach will win him many fans in China. The crux of the problem is that China sees close to US $3 trillion rolling off the printing press during the next year and estimates that such an emission will significantly devalue the real value of their reserves. Of course, they are right!
China, Russia, Brazil, and several other countries are actively trying to replace the greenback as the world's reserve currency. China favors gold
or a gold backed currency, but they have done some currency swaps with Argentina, Brazil, and Venezuela, exchanging Yuan for close to US $40 billion of local currencies in an effort to break the dollar stranglehold. Russia and other countries will follow in their footsteps as a temporary measure, but the star of the show will be gold. Take a good long look at gold's daily chart posted above because this is the most important chart you'll see this year and maybe even this decade.
I have been highlighting this upside down head-and-shoulders formation since prices turned back up in March and we are almost ready to complete the right shoulder (red arrow). The key to the future is how we complete this gap and I see three possible outcomes:
Gold tops at or close to the 999.90 critical resistance and then turns down and stays down for many months. It could fall to 833.00 or even lower as a devastating deflation grips the world's economy.
Gold hits 999.90 and then reacts for a period of three to twelve days, testing support at 933.50, and then rallies through 999.90 on its way to an eventual top at 1,375.00. Under such a scenario the US would probably be suffering from stagflation.
Gold closes the gap at the right shoulder and just keeps right on going up without stopping to catch its breath. Enter hyperinflation.
How this gap is filled will turn out to be the most important event of the year and it will tell you what is going to happen to the dollar, the bond, and eventually the stock market.
Right now we are caught up in a battle between two opposing forces: the manipulative, deceitful forces on Wall Street who rely on a printing press but have no real wealth and produce nothing, versus China and a couple other countries that possess significant reserves as well as production facilities and are accumulating gold. The latter is going to win regardless but how the gap is filled will tell us how and under what conditions. I believe the second scenario is by far the most likely while the third possibility could also play out. The first option, painting a devastating deflation is the least likely but it is also the worst case and the one no one expects, so I naturally worry about that at 3 am.
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