No new high in September, and some notes on deflation

04/10/2009 by Philinje.

Ron Rosen has been tracking two special facts about the month of September, and both have been confirmed as of Oct 1 and in fact today.

One is a non-confirmation in the HUI (Amex gold bugs index) where a high in the price is not matched by a high in the stochastics 4 months after an initial high - which happened 4 months ago (this non-confirmation happened twice before in the past few years, and a sharp correction ensued). The other is the Fibonacci number of months between highs and September was the month of a high. This is to be followed by several quarters of a correction.

He can see the A and B legs since March 2008 as lasting 3 quarters each so estimates the C leg will last 3 quarters, and the bottom will correspond with a long-term low as early as next July and as late as Jan 2011.

His new estimate of the low is just under $700, quite close to the previous low in October 08.

What would negate all this is a new all-time high in October. We are coming to a possible high on Oct 8 and that may be the last chance. Let’s see what happens.

Mining companies, like those in the HUI, and silver and silver mining companies are likely to drop to new lower lows based on the C leg scenario, because their corrections look like zig-zag movements, vs the flat correction for gold. Keep that in mind. Silver and mining companies are always volatile - both gave up roughly 70% or more last October from the high in Mar 08.

In the currency world, it looks like a dollar rally is starting, and according to Delta there is a long-term high in January. Delta also shows a long-term low in the S&P next April, give or take a few months.

The big picture seems to be based on a bout of deflation that will hit us soon and last for about a year. This will be painful. There are lots of good arguments about deflation vs. inflation, but lately it seems the deflation point of view is making more sense. The number one issue is there is still a lack of demand. People are unemployed and saving more, housing prices are still low, fewer loans are being granted, etc. All that money being manufactured by governments and central banks is not really hitting mainstream circulation.

There is one theory about how baby boomers have peaked and will decline going forward. Meaning that demand is now going downhill for a long time. That point of view seems a bit extreme but it’s interesting to note a larger macro trend that almost no one can see right now. Of course, counter to that trend in developed countries are the trends in China, India and the developing world.

So let’s see if we get deflation, then even more stimulus, then massive inflation. It would be an opportunity of a lifetime to invest in gold at the bottom of the C leg, should that come to pass.

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