With the US economy faltering or at best tepid, and prices rising, and high oil, we have similar conditions that led to stagflation in the US in the 1970s. We also have ongoing tension in the Middle East, which contributed significantly to US stagflation in the 1970s with the oil shock back then over Israel. The US also had a silver bubble in the 1970s with silver reaching $50 back then when the Bass brothers attempted to corner the silver market. That price would translate to $150 today according to our calculations adjusting for inflation back to 1980.
So there are a lot of similarities to stagflation in the 1970s and today. If stagflation holds, and there is no US market crash, then metals should stay put where they are or near this range. If stagflation gains steam, gold will resume a rise and silver might test $50 again. We need to see what happens this Summer.
And on the deflationary side of the argument, the US is supposed to end QE2 by end of June. And markets have tried to correct, silver already did being parabolic for a while. One question is can the USD continue rallying and stalling the metal rally? And if the outcome is stagflation, the USD rally could stall that or slow it.
The Dow is testing a critical level around 12500, and looks weak. A USD rally is also negative on the Dow.
As we know, silver corrected about 25%, right after the USD bottomed at 73on the USDX. We warned our subscribers two weeks before that on April 25 that the USD was bottoming and silver was a sell. Two weeks later the silver bubble broke up a bit hard.
But, interestingly, gold held rather steady compared to silver, which, come on guys, had reached double the recent price ranges from a former peak of about $20 for the last few years, then reaching 2.5 times that when silver touched or tried to touch $50 this last year. That was a speculation bubble which was going to correct regardless.
So, in a way, I would not use the major silver correction as a measure to take any credibility from gold’s steady rise to the $1500 range over the years. So, I discount the silver rally/crash as being a total negative on gold prices. Silver is another matter and can correct a good deal here too, if the USD continues rallying, which today the USD is at 75.47 on the USDX, which is heavily Euro weighted.
We also indicated to subscribers the TSX had peaked around 14000 that after the USD bottom alert, and that the Euro was turning down two weeks ago. The Dow is stalled at 12500.
Many Question If Stagflation Will Stay
One thing we have to keep in mind is that in a couple of months there is going to be a verdict on the US debt ceiling, with the US Treasury using bookkeeping entries to cover themselves for a couple of months till the US decides on a budget.
Between the budget uncertainty and US QE ending (supposedly) the uncertainty is high for US markets over the next two months.
If stagflation is to appear, I would think gold will telegraph this to us. The fact that oil prices are still high and gold holding around $1500 after the silver correction indicates that gold sniffs stagflation. But we do not know the outcome of changing/reversing that$600 billion of US QE, and we do not know the outcome of the expected US budget compromise…so the gold price is not certain here indicating stagflation. But its resistance to correcting a lot is noteworthy, in fact on many days in recent weeks the USD and gold rallied together. There is certainly a flight to safety trend in the works with the USD vs. the Mid East and the Euro turning down.
A hard market crash can easily appear, if that happens, we might stall the US economy enough to rule out stagflation, but that remains to be seen.
Remember the US is facing a big test of its bond markets with all this new debt issuance, and who knows how much tolerance the bond markets have now for any further US strains like big budget controversies. So many questions are in the air.
But for the moment, with oil prices high and Mid East uncertainty of a great magnitude, gold should hold stronger in the metals complex than silver, which I am discounting as any major economic indicator right now because there is a lot of speculation in it. It’s kind of messed up as a reliable indicator. Silver has to be looked at separately.
But right after our USD bottom call on April 25, a USD bottom would have clearly popped the present silver bubble, which it did.
We have price ranges we expect for the next month for gold and silver and oil and the Euro for subscribers.
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