Gold Would Go Fast And Furious Soon.

This week, I’ve looked deeply into the issue of inflation, researching what some of the smartest people have to say on the subject.

There are those, like billionaire investor Warren Buffet, who believe that inflation is inevitable: "A country that continuously expands its debt as a percentage of GDP and raises much of the money abroad to finance that, at some point, it's going to inflate its way out of the burden of that debt."

Then there are those, like Nobel Prize-winning economist, Paul Krugman, who don’t believe inflation is just around the corner. Although the powers that be have increased the money supply by a trillion dollars, most of that money is sitting in commercial bank vaults as excess reserves and isn't out in the real world creating “inflation” by buying up cars, houses, and flat-screen TVs.

Although in ordinary times, the Fed’s recent actions would cause “inflation," wrote Krugman in a New York Times article, these aren't ordinary times.

“Banks aren’t lending out their extra reserves. They’re just sitting on them -- in effect, they’re sending the money right back to the Fed. So the Fed isn’t really printing money after all.”

In my opinion, banks aren’t lending yet, but that's likely to change. Think about it in market terms: The short-run situation may be irrational and emotion-driven (banks may fear to lower cash reserves if case additional regulations are introduced), but in the long run, it's the fundamentals that drive prices. Banks have money but want to earn more, so they'll eventually lend it to earn interest.

Nobody can be absolutely sure what the future holds for inflation. In my view, the vast majority of signals are screaming “inflation ahead."

As far as implications for the USD Index are concerned, we've been sideways for approximately a month now -- a considerable amount of time -- thus making the correction more likely to be completed soon. This is naturally bearish news for the US dollar and bullish for the precious-metals market.

There are signs that the general stock market may move lower in the short term, because it has snapped the neckline of a head-and-shoulder of the S&P. Should that be the case, it could affect the prices of precious metals --particularly silver. Still, I believe this would only be temporary.

The breakdown below the neck level (currently below the 90 level) has been confirmed by a relatively high volume just after it materialized. Additionally, we witnessed a brief pullback to the neck line, which didn't close above it, thus confirming the formation. Unless we see a sharp move above this line (89 level) on Monday or Tuesday, the technical picture remains bearish for the general stock market.

GOLD

Last week has been disappointing for precious-metals investors as gold, silver, and corresponding equities followed the general stock market lower.

Gold moved lower despite the technical similarity to a previous pattern that was followed by higher prices. Higher prices were likely, but of course, not guaranteed. In order to make calls that have the greatest probability of being correct, it's important to always take what the market provides and use it on an “as is” basis.

Currently, gold appears to be close to bottoming out, as it seems to be forming the zigzag correction pattern. As mentioned in the past, precious metals tend to correct in a zigzag fashion, and this time we could see another example of this tendency -- meaning the bottom is rather near. Meanwhile, the medium-term chart has not changed much in the past week.

The bullish cup-and-handle formation is still intact, even though the “handle” is now considerably bigger. This doesn't change the overall bullish implications this chart has on gold prices. Additionally, the stochastic indicator -- which has proven a valuable tool in timing local bottoms in the past -- is also suggesting that the bottom is rather near. I'll provide you with one more chart from the premium version -- one indicator suggests that higher prices are likely in the future.

The long-term situation remains inflationary and favorable for the precious-metals sector; however, the short-term situation is rather cloudy. In the very recent past, precious metals have taken the general stock market’s lead, while the dollar has been trading sideways without a decisive breakout or breakdown from its trading range. The long- and medium-term trends are down for the USD Index, so a breakdown from here is more likely than another counter-trend upswing. Still, a significant plunge in the general stock market may negatively affect prices of gold, silver, and corresponding equities.

Investors who are already in the market and plan to keep their positions for at least several months don’t need to trade the rest of the downswing. Short-term speculators might want to wait a little longer before opening a long position in the precious-metals market.