9/21 Gold Says: Short term Deflation with a Worldwide Recession

By John Galt
September 21, 2011 – 05:25 ET

As many of my readers and listeners know, I am a huge proponent of pattern recognition not just within individual equities, markets, or commodities but in economic cycles also. Despite massive attempts at intervention in Europe and the United States, the actions since the summer of 2010 have been feeble at best, pathetic in reality. The chart pattern for gold was signaling a long term inflationary trend with the potential for hyperinflation until the double top was formed, creating a warning that the downside correction that is months overdue is quite possibly going to begin in earnest this week.

The charts do not lie as a double top looks to be in place and all of the information leaked via the media thus far does not deflect the idea that the Federal Reserve decision this afternoon will disappoint markets and indicate that an economic contraction is permissible by the banksters to force the political elites to dance to their tune. It is a dangerous game of cat and mouse and will provide a massive accumulation opportunity if the trading range between $1450 to $1575 that could be reached in a matter of weeks would be validated by a move of the US Dollar index above the 80 level. Also, this provides those central banks one more chance to purchase gold at a bargain basement price and to cool the discussions of $2000, $2500, and $3000 gold by year end recently circulating in economic discussions.

(Click on the chart to enlarge/reduce)

gold_jgfla_1yr

There are wild cards which could blow this theory sky high and create what I hate to say would be the “super bull” an unstoppable frenzy to loftier levels:

1. War in the Middle East

2. Collapse of the Italian financial system with a partial default

3. Implosion of the  Chinese local governments via default on a large portion of the $1.7 trillion in loans outstanding

4. Collapse of several major American banks

If any of those events or combinations thereof occur, look for a flight to safety as US Treasuries are already well overbought. In the interim, barring the unusual, gold should correct, consolidate and return to a trading range to build for the next move above $2500. As soon as gold breaks the rising 50 day moving average (the blue line in the chart), look for the gold bears to scream the loudest, Cramer to abandon ship again, and the usual suspects to offer their snarky and ill-informed commentary on “Spam” and the “barbaric relic.” Such a correction would be healthy, beneficial for the long term bullish move, and perfectly logical considering the inconsistencies in ECB and Fed policies we are witnessing at this time.

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