After QE was unveiled in 2008, Western investors began to buy gold and related items with aggression. They believed that the Fed’s QE program would dramatically increase the money supply. They were correct.
Unfortunately, these investors didn’t understand that if a huge money supply has declining velocity, there is no meaningful price inflation created, at least in the short term.
By 2013, mainstream reports showed that inflation had still failed to materialize. Demoralized QE-focused investors began to liquidate their gold and related holdings, and booked substantial losses.
Did they give up just as money velocity is about to reverse the downtrend?
Submitted by Stewart Thomson:
1. The Western super-crisis entered a lull period in 2013, and surging economic growth in America has become the main focus of most mainstream analysts.
2. The stock market tends to lead the economy by about six months, so it’s likely that much of US economic growth in 2014 is already priced into the Dow.
3. For the long term, I would focus more on Asian stock markets than Western markets, partly because population demographics show that the West has an ageing population, while most Asians are relatively young.
4. Please click here now. While the US stock market is being carried higher by fewer and fewer stocks, the Chinese stock market (using the FXI-nyse proxy) appears to be verging on an upside breakout from an enormous symmetrical triangle pattern.
5. While I’m totally out of the American Dow, I do own the Chinese market. I’m a buyer of more FXI on every 50 cent decline, using my “PGEN” (systematic risk capital allocator).
6. Please click here now. After QE was unveiled in 2008, Western investors began to buy gold and related items with aggression. They believed that the Fed’s QE program would dramatically increase the money supply. As you can see from this chart, they were correct.
7. Unfortunately, these investors didn’t understand that if a huge money supply has declining velocity, there is no meaningful inflation created, at least in the short term.
8. By 2013, mainstream reports showed that inflation had still failed to materialize. Demoralized QE-focused investors began to liquidate their gold and related holdings, and booked substantial losses.
9. Did they give up just as money velocity is about to reverse the downtrend? I think so. Please click here now. This M2 velocity chart shows the long term money velocity story; as the public surged into the stock market in the late 1990s, corporate executives began hoarding cash, and they have continued to do so.
10. “For at least a decade and a half, cash has progressively increased its share of the American corporate balance sheet, to the point where U.S. quoted companies have turned into the Scrooges of the global economy…. Such is the scale of this cash pile that the U.S. corporate sector must have been partly responsible for the surge in demand for safe assets and the decline in interest rates that fueled the U.S. housing bubble.” – John Pender, Financial Times, December 31, 2013.
11. Powerful investors like Carl Icahn are suddenly putting a lot of pressure on companies, to put their hoarded cash to work. I believe that corporate profit gains from cost cutting are peaking, and further gains will only come by increasing revenues.
12. The probability of a turn up in money velocity in 2014 is growing, because corporate spending is likely to grow. Please click here now. This M1 velocity chart shows the collapse in velocity that has occurred since the QE program began.
13. QE tapering will force investors to move away from mortgage securities and T-bonds. They will likely invest those funds in the stock market and private equity funds. Their substantial liquidity flows will boost M1 velocity.
14. I predict that M1 velocity will not simply rise, but begin to surge, as QE is tapered all the way to zero in 2014.
15. If the stock market is correctly anticipating that economic growth will increase nicely over the next six months, demand for base metals should soon overwhelm supply, creating higher prices.
16. Please click here now. This is an interesting long term (quarterly bars) chart for copper. From a technical perspective, the 2008 collapse took the price precisely to a key trend line in the $1.50 area, but most of the trading since 2006 has taken place in what I call, the “Asian growth zone”.
17. If a rise in M2 velocity occurs as the Chinese stock market breaks out upside, that could raise the price of copper above five dollars a pound, into what I call the “inflation zone”. Institutional alarm bells would begin to ring, and they would begin to buy commodity markets with a fair bit of size.
18. Please click here now. That’s the daily copper chart, and there’s a key bullish breakout in play.
19. The price of gold may have numerous rallies in 2014, but a reversal in M2 combined with five dollar copper could set off much bigger buying of all inflationary hedges.
20. Please click here now. That’s the daily uranium chart, using the U-TSX proxy. Note the rare triple bottom in play. Gold bullion is my largest holding, and it always will be, but moving a small amount of capital from gold bullion to uranium, copper, and palladium, is probably a prudent action to take now.
21. Those three markets will likely be the first commodities to react to a reversal in M2 and M1 velocity, and the simple fact is that the early bird gets the biggest worm!
22. Please click here now. Double-click to enlarge. This weekly GDX:GLD ratio chart covers about five years of the price action of gold stocks against gold. Almost every technical indicator on that chart is flashing a bullish non-confirmation signal.
23. Also, please note the stunning volume that has occurred over the past few months in gold stocks compared to gold. There has been some dilution of shareholders, but the bulk of this volume is likely related to a “changing of the guard” event. There is also “wedgification” beginning to appear on that chart, where one large bullish wedge morphs into smaller bullish wedges. That’s also very bullish.
24. Strong hands understand that accelerating money velocity creates inflation. Accelerating the velocity of a money supply that was dramatically expanded in size by QE, could unleash an inflationary monster, and create a dramatic 2014 outperformance of gold stocks against gold!
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