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Jim Willie CB is the editor of the “HAT TRICK LETTER”

For specific detailed analysis of the Gold, USDollar, Treasury bonds, and inter-market dynamics with the US Economy and Fed monetary policy, see instructions for subscription to my newsletter research reports, which include stock recommendations positioned to rise in the commodity bull market. Articles in this series are promotional.

Back in 1995, early experiences with gold charts were fascinating as my teeth were cut during the last emergence from a recession. The end of that USFed Reflation Initiative was rocky, turbulent, and chaotic, but far more successful than the current effort. Many analysts fully expected a rise in price inflation, and an associated rise in the gold price. My expectation echoed theirs, but the growing Asian outsourcing trend had thoroughly caught my attention, since my days with a major computer mfg firm were still fresh in my mind. My clients extended to mfg engineers in Hong Kong, Taiwan, and Singapore using a nifty quality control procedure with my signature on it. Output from these plants were critical components whose cost advantage was clear. An aside, my QC procedure saved each mfg site a documented $3 to $4 million per year from reduced testing hours in a stressed environment. The entire Pacific Rim was on fire, exploiting cost advantage, marked by gigantic imports into the United States. The many players were called “Asian Tigers” whose title one hears little anymore.

Gold was in a heated battle as it wrestled with the $400 price level in 1995 and the following year. My young chartist eyes once detected a near-term bullish Head & Shoulders pattern, without any doubt. However, lurking in the reeds within the chart was a bearish Head & Shoulders pattern of more short-term nature. Gold failed to sustain its run, reversed, and fell to the downside target on the nearby pattern which revealed itself. It was quite an educational experience, painful and costly though. Most educations are, as memories of graduate school can testify, surely with more accolades, more satisfaction, more comrade adulation, and less bloodletting, not to mention a slick piece of parchment to show for it. 

Back then ten years ago, China was nowhere to be seen, still fast asleep. This time around, China has totally, unfortunately, and unequivocally ruined the Reflation Initiative which began in 2001. Our banking leaders have attempted to prompt widespread inflation which has firmly taken root on the cost side but not at all on the wage side. The absence of corporate product pricing power and wage gains even has former Treasury Secretaries Larry Summers and Robert Rubin perplexed. They have each spoken publicly about it, calling it a failure of wealth distribution. Not just these leading figures, but also the Brookings Institution has raised attention on this matter. They point to a 3.2% wage decline in adjusted terms since October 2001 during the so-called economic expansion. My description is more a crack-up boom, continued economic stall, historic cost inflation, and failed job creation, temporarily given reprieve by Greenspan’s final bubble in housing. Their shared concern is over a major paradigm shift after entry of a few hundred million Chinese workers in to the global village equation. Or is it a global pillbox? Concern is over the lack of catch-up in wages after basic inflation and productivity growth, an effect which has utterly failed to materialize. They prefer not to speak publicly about how productivity has lifted the Asian standard of living, not ours. Even Chairman Bernanke acknowledges a bad trend in participation of the American dream. Lastly and hardly least, concern is over vulnerability to economic populism, which might seek a solution with greater trade protectionism. Worker angst has risen. To tap into it, politicians might pursue trade tariffs, import quotas, a detrimental factor present during the Great Depression.

Reversals are funny things, actually quite delicate phenomena. When not from a very gradual slowly developing unfolding story, they often seem to manifest themselves in the form of Head & Shoulders (H&S) patterns. Extremes are reached, only to find the other camp state its case adeptly, sell it in the trenches, even with occasional assistance by a well-placed timely cooperative media article. With so much tug & pull, a brief withdrawal of force from one side, or a sudden surge of force from the other side, and bingo, the price breaks out upward or breaks downward. The reversal reverses itself into the other direction. The current climate for competing and opposite scenarios has once again shown itself. Will housing send the USEconomy into the pits, to wallow in the depths for months on end, sure to subdue prices? Or will housing stabilize with USFed assistance as officials flood the system in the nick of time, cuts rates again, and saves the day, sure to push up prices? As in 1995, a similar perplexing question plagues the professional corps within the investment community on the direction of the USEconomy and systemic prices. And once again, hidden in the reeds is a nest of reversal patterns, yet to be resolved, but swinging up and down in the ongoing battle of analyst perception, trader wills, market spin, and policy statements.

THE BEAR CASE

Much attention has been given to the unresolved bearish H&S pattern signal for the gold and silver mining stock index, one of a disconcerting if not foreboding nature. The HUI index, unlike the gold chart, has exposed a bearish H&S which has put the gold community on hold. The high alert condition persists. It has yet to be resolved, although the continued “right shoulder” extension is a good sign to defuse the bearish signal with each passing week. Note the critical shoulder level at 280, so far successfully defended. No upside contradicting price action has yet taken place above the neckline level at 350. Without resolution, the alert remains in place. A breakdown would cause indescribable pain, outcry, and distress to the gold community, since the target would call for a 25% further decline.

THE BULL CASE

On the other hand, or on the other shoulders, lies a hidden H&S pattern from within, one of an optimistic nature. The robust bounce off the 200-day moving average in mid-June could easily be identified as a “snapback” led by physical demand for gold bullion. One cannot point to a vividly clear new short-term reversal pattern enmeshed within the nine months displayed below. The shoulder is less fully developed and unambiguous. However, the pattern within the pattern is worth pointing out. Its head is clear. Its neckline at 310 is clear. Its shoulder level at 350 is not so clear. Upon upside breakout, the target is 390, which would represent a retest of May highs. In my analysis, a range between 310 and 350 might carry on for a couple more months, as market seek clarity of direction on many scores.

BATTLE OF FACTORS

Even the USTreasury Bond market has entered the fray. Consumer prices still show an uptrend when looking at year-over-year changes. The uptrend even shows up in the core which excluded food & energy, which is important for those of us who don’t eat and don’t drive and don’t buy anything shipped and don’t pay utilities for home usage. Housing slowdown will indisputably weigh down the overall USEconomy in the coming months. Every previous recession was led down by housing. The USTNote 10-year yield (TNX) has pushed down from slower housing starts, slower new home sales, slower existing home sales, rising inventory levels, and rising cancellation rates for home buyer of all kinds. In the spring months, the TNX rose to 5.25% upon a jump in the CPI. The battle rages. The TBond arena serves as a battleground before our midst. We might have seen a downside target for the 10-yr yield, as it just hit the 4.8% mark. That is where the 200-day moving average lies. Look for the long-term interest rate benchmark to bounce off this key mark, especially since price inflation pressures have not disappeared. 

Despite great assistance from statistical distortion, the CPI has only begun its new cycle upswing. My personal viewpoint differs from many. The GDP (gross domestic product) is exaggerated by at least 4% from inadequate removal of price inflation, so that much of our price increases are misinterpreted conveniently as economic growth! This view confirms the Treasury Yield Curve, which has been flat as a pancake for almost a fully year. Its reliable signal of economic slowdown has required massive denial by the clowns working at the USFed, the hacks working in the USGovt, and the harlots working on Wall Street.

USFed Chairman Bernanke has testified that an economic slowdown will serve as a meaningful force for more tame consumer prices. When pressed, he admitted that prices are a function of monetary expansion (money supply growth), embarrassed before the US Congress on his heretical view. Or was it a wish, a truly big wish? Given the abolition of the M3 money supply statistic, perhaps he hoped financial observers had forgotten about the gigantic growth in money supply packed in the pipeline. The most frightening statistic on my desk is that $7.5 new dollars in debt creation (financial + non-financial) is required to generate a single $1 in new economic activity as measured by the GDP. Such are Weimar inflation signals. Another point of embarrassment for “Helicopter Ben” is that his Fed Funds target for overnight bank lending at 5.25% is now over 40 basis points above both the 2-year TBill yield and the 10-year TNote yield. More than any other reason, the USFed held back from another excessive rate hike last week. They did not want to look incompetent, blind, and stupid.

EDITOR NOTE

By the way, has anyone thought of a hidden powerful motive for the Lebanese-Israeli War? The BTC oil pipeline opened last May 2006 amidst big corporate hoopla but no US press coverage. The strategic pipeline stretches from Baku Azerbaijan on the Caspian Sea, past Tbilisi in Georgia, across Turkey to its port Ceyhan on the Mediterranean Sea. Within several months, it will serve as the port for one million barrels of oil per day. We have been denied the oil motive in Iraq, in favor of the spread of democracy and the fight against terrorism. They critical BTC pipeline is the most important oil transit route in almost 30 years. It bypasses Russia and Iran. The Ceyhan port is a mere 100 kilometers from the Syrian border. Its security is not assured, in any way shape or form. This story has disappeared from the news despite its huge importance. My analyst thinking always focuses on stories of a critical nature which never find their way to print. Usually, a hidden motive is being suppressed. Call me suspicious. My June report to members covered this story, which now seems even more vital.