The moment of truth for PM is coming

Let's see if gold stocks and silver will be able to confirm the gold rally. The high of 2008 is at about 57 :

For the silver we're close to the  2008 high too:

Is Ben really almighty as he may pretend and can change natural lows of deflation and inflation:

The coming  days are really important and will show the direction for the future market action not only in the PM sector.

Don't wake a hungry bear!

I should note that equity market was greatly prepared for the yesterday's sell-off.
From the technical point of view, we have passed the 10 months time frame, which is 62% duration of the previous bear market.
Fundamentally, we're in the 3rd quarter of upbeat earning reports and given the 60%+ rally, the cost reducing efforts of US companies are at present more than fully discounted by the market.  What we need to hold, not speaking about  the rise, is the growth of sales, that means a real, consumer driven recovery. But the unemployment, which is rising along with cost cutting programs, can't provide any confidence to the consumers.

On the political front, Democrats have lost an important election, and it's not a good thing in the mid-term elections year. That's why in order to gain some popularity, Obama has to do things which will please its voters. And what else will be more popular than an exemplar punishment of the authors of the current crisis. The same who were responsible during decades for pumping money in to the system. All this is deflationary and mister market feels it.

On the short term charts I've got an impression that we need, at least, one more wave down for SPX as well as for NASDAQ. Moreover, it's highly probable that one of these indexes if not both has put its top in.

And, in my opinion, we have a similar situation with currencies. In order to complete the pattern EUR/USD has to plunge one more time, probably toward 1.38.
In any case, we're only at the beginning of the second (3d in Elliott Waves terms) wave of dollar appreciation.

A view on the precious metals

In the precious metals complex, I'm watching closely 3 components : gold, silver and the gold bug index HUI. Until the recent sell-off, the three have advanced more or less synchronously. Moreover, the run in the precious metals that preceded  was  real not only in US dollars, meaning the investors are scared of  the  (hyper)inflation on the global scale.
As the dollar has started to gather some strength, these hedges have been thrown away. But, as far as we continue to stay in "corrective mood" in the broad market, the things are, in my opinion, not done, especially for gold. The yellow metal's sell-off is looking much as a correction and I would expect gold to reverse from 108-109 range to push higher at the beginning of New Year as high as 126-132 for the ETF (GLD) or 1270-1330 for cash. Indeed, I would expect gold to make new historical highs as we enter the initial phase of the new wave down for stock indexes,   it was already the case  in the 4Q  2007 and 1Q 2008.

For the gold miners and the silver, the things are much trickier. They are more sensitive to the prospects of the broad stock market. And, in my opinion, they are far from being bright at this point.The gold bug index has stopped its advance right before the top of 2008, rising the probability of the double top.

The silver has reversed right under its Jul 08 minor top, nearly my preferred level of March 08 gap (19.40). I must say, that the whole advance in silver and HUI looks to me as corrective, since I can't rule out that their declines from the March 08' was in impulsive way.

So, my conclusion: the gold is very certainly correcting and will take new highs in the beginning of the 10', pushed by the deflationary forces. We may have the situation where gold and dollar move in the same direction. As for the  gold stocks and silver, the situation is not easy, at least they will lag gold, creating the situation of non-confirmation.

A tough call

In the time of rush on gold, I'd like to share my call on Silver:
We gonna put a top in coming days under the 08' highs, the most likely around 19.40 for the ETF (SLV). This top has a very good chance to stay for more than a year, and if the markets plunge in the second wave of deflation, as I expect, we'll see silver under 08' October's lows of 8.50.

USD: noise and reality

Lotta noise on dollar's fate recently may hide the real story in the process of making. The dollar is the main  funding currency in the world. Trillions of liabilities are dollar denominated and should be payed back in dollars as well. Under the light of the private credit contraction, I think it's the time to take seriously the long ago  discussed theory of the Synthetic Short Dollar. I remember, when  gold bugs were criticizing the theory as something impossible due to the fact that a genuine deflation in US is impossible. And, really, the Fed and US government did all they could to stop the deflation. Did they succeed? The time will show. But we must take in account that they had a good ally - China. Being pegged to USD, the RMB credit expansion has amplified the American reflationary attempt. Moreover, I would even think that it's the Chinese who have reflated  the World economy and only because of the peg we have felt it as a dollar reflation. Since this reflation attempt is clearly slowing in the US and China, one could suppose  that, US and China deflationary forces will strike back with the vengeance and hence the dollar will rise. It's exactly what the USD index chart suggests:

The bottoming process, in my opinion, is clearly underway. Should we break out the blue trend line, a sharp rally will ensue with very certainly higher than 90 as target. Of course, that rally will go along with a massive stocks and low quality debt liquidation.

3 possible scenario for the next wave of crisis

Seeking Alpha publishes an interesting article on 3 possible ways the next wave of crisis will play out.

In brief they analyze 3 scenario :
Deflationary: dollar and bonds  rise, stocks fall.
Inflationary: dollar and bonds continue to fall, stocks continue to rise. In one word: more of what we have  already, and that's precisely why, in my opinion, it's the least probable:  at present, the real economy and financial markets are going in the different directions.
Hyperinflationary: all paper instruments fall destroying the economy as we know.

A simple analysis of some recent trends  gives a higher chances for the 1st scenario. It's my opinion as well.

Is Gold the best hedge against the inflation?

My positive opinion on precious metals has materialized in the new historical highs for gold and cyclical for silver. The public attention has been largely attracted by the gold installing above 1000 dollars mark. As for me, I'm happy with just new cyclical highs in silver. Really, is the gold the best hedger against the inflation (or should we say reflation) where we are supposed to be ?
Looking at gold to silver ratio we see that gold is a strong outperformer in a deflationary environment, as the one we have experienced last fall. Since the reflation policy has started to work, the silver has started to outperform gold.

We can even try to judge the "quality" of the reflation policy regarding the eurozone on the chart with gold priced in euros: the recent top in dollar is far from confirmation.

Or to find  which country is the biggest bénéficier of the policy of global reflation, looking at gold priced in Australian dollars:

Even Dow  has managed to do better since the reflation attempt has begun:

So, my conclusion is that gold as well as cash is the best investment during the periods of credit stress which we have seen during second half of 2008 and 1Q of 2009.  But for the period of  "reflation" gold under performs other assets (except cash)  and will even further under perform silver should we enter a period of higher inflation.