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    - Interim Update 21st January 2015

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Real Performance Comparison

Two or three times per year we present a set of "inflation"-adjusted (IA) charts to show how some important markets have performed after accounting for the long-term effects of US$ depreciation. Now, for the first time, we are presenting a single chart that compares the long-term 'real' performances of several markets. This chart makes some interesting points.

One of the most interesting points is that market volatility increased dramatically in the early-1970s when the current monetary system was ushered in. This shows that the generally higher levels of monetary inflation and the larger variations in the rate of monetary inflation that occurred after the official link to gold was abandoned didn't only affect nominal prices. Real prices were affected in a big way and boom-bust oscillations were hugely amplified. As an aside, economists of the Keynesian School are oblivious to the swings in relative 'real' prices caused by monetary inflation and the depressing effects that these policy-induced price swings have on economic progress.

A second point is that commodities in general (the green line on our chart) have experienced much smaller performance oscillations than the two monetary commodities (gold and silver). This is consistent with a statement we made in an earlier commentary -- that there aren't really any long-term broad-based commodity bull markets, just gold bull markets in which most commodities end up participating.

A third point is that apart from the CRB Index, the markets and indices included in our chart have taken turns in leading the real performance comparison. The chart shows that gold is the current leader, closely followed by the Dow Industrials Index (since January-1959, the percentage gain in gold's real price is slightly greater than the percentage gain in the Dow's real price). However, if dividends were included, that is, if total returns were considered, the Dow would currently be in the lead. This will change.



    Chart Notes:

1) As advised in many previous commentaries, we use a method of adjusting for the effects of US$ inflation that was first described in a 2010 article (http://www.321gold.com/editorials/saville/saville121510.html). This method isn't reliable over periods of two years or less, but it should come close to reflecting reality over the long term.

2) To make it easier to compare relative performance, the January-1959 starting value of each of the markets included in the above chart was set to 100. In other words, the chart shows performance assuming that each market started at 100.

3) The monthly performance of the scaled IA silver price peaked at more than 2600 in early-1980, but for the sake of clarity the chart's maximum Y-axis value was set to 1500. In other words, the chart doesn't show the full extent of the early-1980 upward spike in the IA silver price.

The giant con-game has suffered only a minor setback

Paul Krugman unwittingly reveals the bankruptcy of Keynesian economic theory on almost a weekly basis. Classic examples include his statement in 1998 that in order to facilitate an economic recovery in Japan the Bank of Japan needed to credibly promise to be irresponsible (a statement of which he remains proud to this day), and his 2011 suggestion (repeated in 2012 and 2013, obviously because he thought it was a smart idea) that the US should prepare for an alien invasion on the basis that the wasteful spending associated with such an endeavour would help the economy. He continued the pattern in a recent NY Times column about the Swiss National Bank's decision to remove the euro peg, by lamenting that the SNB move could have the deleterious effect of causing people around the world to question the general commitment of central bankers to currency depreciation. Apparently it would be a disaster if a critical mass of people came to believe that central banks would NOT risk destroying their currencies in their efforts to boost the fictitious Keynesian fixation known as "aggregate demand".

Unfortunately, the economies and financial markets of the world are sufficiently fragile that what Krugman says can have an effect. In this case, however, Krugman's silly comments don't matter, because the SNB action constitutes only a minor setback for the giant con-game known as central banking. After all, Switzerland's central bankers haven't exactly rededicated themselves to sound money; they've just made sure that the fate of the Swiss franc (SF) isn't tied to the fate of the euro. Other than that, they are continuing to toe the party line by aggressively inflating the SF supply and keeping interest rates at ridiculously-low levels. Furthermore, confidence in the Fed does not appear to have been materially dented by the SNB move. Gold shot higher in US$ terms, but this was a reaction to perceived problems with the euro.

Uranium Update

The uranium market wasn't able to sustain the November-2014 break above $40. The lack of reaction by the uranium mining stocks to the surge above $40 was therefore correct.

The spot price is currently around $36/pound. The mid-$30s appears to be the 'right' price at this time, with last year's plunge to the high-$20s and surge into the $40s being aberrations.



We expect that the spot uranium price will work its way up to around $50 by year-end, with the bulk of the gain coming in the second half of the year. Also, although a sizable portion of today's uranium production is uneconomic at the current spot price, we expect that the price recovery will be related more to increased demand than reduced supply.

The increase in the demand for uranium is expected to stem from reactor re-starts in Japan, a concerted shift towards nuclear power generation in China as part of a plan to address that country's massive pollution problems, and rebounds in fossil-fuel prices.

The Stock Market

The US

At this stage the SPX's decline from its late-December peak looks like a routine short-term pullback. A daily close below support at around 1970 would be the first sign that it is something more serious.



Europe

France's CAC40 Index has broken its sequence of declining tops. It will be interesting to see if the breakout is sustained after the ECB news due later today (Thursday).



As the financial world waits with bated breath for definitive information regarding the size of the ECB's new pro-inflation program, the EURO STOXX 50 Index, Europe's equivalent to the Dow Industrials Index, is poised at intermediate-term trend-line resistance. Will it break out or will it reverse lower and maintain its sequence of declining tops? We'll soon find out.



Gold and the Dollar

Gold

Another peg change that could affect the gold market

Last week's elimination of the SF's peg to the euro caused the gold price to rally in terms of the euro and the US$. The price rise means that the global demand for gold moved a little higher, probably due to what the SNB's decision implied about the ECB. After all, if the Swiss National Bank has no confidence in the ECB, then why should anyone?

Another currency peg that looks vulnerable is that of the Chinese Yuan to the US$. As the US dollar appreciated against all other currencies over the past 6 months, so, thanks to the Yuan-US$ peg, did the Yuan. Considering that China's policy-makers are labouring under the same wrongheaded notions about the drivers of economic growth as their Western counterparts, it's a good bet that the Chinese are now feeling a strong desire to weaken their currency. Consequently, unlike the sharp upward re-valuation of the SF that occurred after the euro peg was abandoned, a change to the Yuan-US$ peg, when it eventually comes, will almost certainly involve a downward re-valuation of the Yuan.

When this happens it could generate fear that the world is headed for an all-out currency war. Since the economic illiterates that run the Fed would feel obligated to join such a war, a likely result would be a large increase in the demand for gold.

Current Market Situation

The ECB's decision regarding a new and 'improved' asset monetisation program will be announced a few hours after this commentary is published. We don't know what the ECB will announce or what the gold price will do in the immediate aftermath of the announcement, but we suspect that if the gold price doesn't make a multi-week high this week then it will do so next week. Also, although it is not 'supposed' to happen this way, we won't be surprised if an interim top in the gold price coincides with an interim top in the Dollar Index.

With regard to nearby resistance and, therefore, near-term upside targets, there is the top of an intermediate-term channel at around $1325 (refer to the following chart for details) and important lateral resistance at $1350. We think that the higher of these resistance levels should currently be viewed as the maximum realistic upside target for gold during the first quarter of this year.

Regardless of whether it has already begun or begins after a move up to near $1350, a routine multi-week correction would be expected to take the gold price down to around $1250.



Gold Stocks

In the email sent to subscribers on Tuesday night EST (Wednesday morning our time), we wrote:

"The gold-mining sector is not yet short-term 'overbought', but the HUI has reached its 200-day MA. This means that it has reached the minimum objective we had in mind for the rally of the past several weeks. It could move higher as the markets anticipate and then react to the outcomes of this Thursday's ECB meeting and Sunday's elections in Greece, but we aren't expecting a sustained rise above the 200-day MA to happen in the near future.

The upshot is that it's time for investors with substantial exposure to the gold-mining sector to START taking some money off the table. Bear in mind that a short-term selling opportunity is a short-term selling opportunity, regardless of your cost.
"

After a market has suffered a large decline, a rebound to the vicinity of the 200-day MA is the most that can reasonably be expected from the INITIAL rally. It could go a bit higher, but a market that has just suffered a sharp fall after having spent years in a bearish trend is unlikely to rally back to the 200-day MA and then just keep going. That's regardless of whether the rally is part of a new bull market or a bear-market rebound. If the rally is part of a new bull market then the rise to the 200-day MA (or a little higher) will typically be followed by a pullback or a sideways consolidation lasting at least 4 weeks. The start of a new bull market would then be signaled by a solid break above the high of the initial rally.

With the HUI having reached both its 200-day MA and the chart-based target created by the break above short-term resistance at 180, it's likely that a multi-week correction will begin this week or next week.



The Currency Market

We are expecting that there will be an upward reversal in the euro within the next few days almost regardless of what the ECB decides at its 22nd January meeting.

Updates on Stock Selections

Notes: 1) To review the complete list of current TSI stock selections, logon at http://www.speculative-investor.com/new/market_logon.asp and then click on "Stock Selections" in the menu. When at the Stock Selections page, click on a stock's symbol to bring-up an archive of our comments on the stock in question. 2) The Small Stock Watch List is located at http://www.speculative-investor.com/new/smallstockwatch.html

Chart Sources

Charts appearing in today's commentary are courtesy of:

http://stockcharts.com/index.html
http://bigcharts.marketwatch.com/

 
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