Gold and Silver might be breaking out.

Today's WSJ headline says "Fed Minutes Suggest Action Likely".   Why so likely?  Simply because the global economy is rolling over.  The data to support this is abundant at the global and US level.  Major exporters like Germany and China are seeing rapid declines in growth.   In the US, we keep hearing about the "fiscal cliff" from normally verbally reserved organizations like the CBO.  Any reduction in spending is only going to make a bad situation worse.  Any continuation in spending will only throw good money after bad because it is all debt based spending.

The basic issue is that the Debt  Ponzi has peaked.  People are not taking on new debt fast enough to keep the debt Ponzi growing anymore.  The reasons are varied but it comes down to 4 main areas:

1. Job loss or fear of job loss has people acting more conservatively, saving more for a rainy day, spending only what is needed when needed.
2. Boomers are retiring or thinking of retiring.  This is pretty much the same as permanent job loss or knowledge of impending permanent job loss.  Thus it has the same result: less spending overall and much less debt based spending.  Debit cards instead of credit cards.
3. Too much existing debt.  People have partied hard with debt based consumption and now they are loaded to the gills with existing debt.  They have no room left on their credit accounts to buy more.
4. All the debt based consumption has left people with lots of stuff.  So much, in fact, that there is hardly room to store it.  In fact, they want to downsize their house leaving even less storage room.  It will take more than a little bling to get people to buy more.  You can not just offer them more of what they bought last year and get them to bite.  You have to innovate and do something new and that takes time.  In the meantime, people will hunker down and pull in their horns.

In response to all of this, the government is following the Keynesian playbook and racking up debt in the name of the people.  If the people don't want to spend, government will do it for them (or "to them" as the case may be). 

Government has two basic choices during the collapse phase of the debt Ponzi : let it collapse under its own corrupt Madoffian weight or try to pump it up more. 

• If they let it collapse, their precious banks will collapse.  People who thought they had savings and pensions will find out during the associated bank runs that their money evaporated.  More to the point, that their money never existed in the first place except as accounting entries in the books of fraudulent criminals.  I wish to heck that this was an emotional overstatement but I'm afraid that it is perfectly factual.
• If they pump it up more, it keeps hope alive that more debt might be able to be used to grow its way out of the existing debt.  Of course, this is mathematically flawed Keynesian thinking that is best left to simpletons and charlatans.  More debt is not the solution to too much debt!  But the only way to provide more stimulus is to take on more debt because we do not have the cash to spend.  As that happens the value of the currency falls meaning that your savings account and monthly paychecks lose buying power. 
• Note that in both sudden collapse and pump until eventual collapse scenarios, the required outcome is the loss of savings of the people.  This is because much of the savings are simply book entries and the people have already lost their money but simply have not been told about it yet.  In other words, no different from any other Ponzi.  Sure, if they take the money out right now before everyone else gets wise and goes running for the door then the money will indeed be there but much of the savings is locked up in the 401k trap from which there is no easy escape.  Besides, people always leave their trust and their money in the banks far beyond the point where it is obvious that collapse will happen.  Some people simply cannot handle the truth and so they go into "head in sand" mode or they let others intimidate them into not recognizing the obvious using words like "conspiracy theorist", etc.  It's herding behavior 101.  The result is that there is always lots of money lost when the bank runs eventually arrive.  A bank run is when all the people suddenly realize that all the other people are figuring out the truth and so everyone panics in unison.

The con men will chose the latter of course (inflation) because the former would be the honest but immediately difficult path and these guys hope to outlive the arrival  of the carnage.  After all, it was Keynes who said "in the end we are all dead".  The Keynesian scam is basically use debt in all forms to pull consumption forward.  Via this mechanism they suck much of the future value out of the economy so that we can live better today and then not worry too much about the debts left for those who follow because "we will all be dead".  Ever notice how the word "predator" is made up of two fragments "pre" and "dator"?  In the case of the Keynesians, it would appear to imply that those who come first predate upon those who follow simply by virtue of pre-dating them.  They hold the high ground because they make the rules and skew them in their own greedy favor.

Yes, the fed will grit its teeth and inflate because it knows that it's the only politically viable choice anymore.  If Bernanke were to dig in his heels and suddenly turn honest, Congress would strip him of his power and either replace him with a puppet or simply change the rules so that he would be irrelevant.  Think this is impossible?  It's already happening to the German equivalent of Bernanke.  For those not keeping up, Mario Draghi is the sitting European Central Bank president.  He is the unelected chief moneyman of the European Union.  Draghi is publicly ridiculing Germany's central bank (AKA Bundesbank) president (Weidmann) for opposing EU requests that Germany guarantee more EU debt to bail out the PIIGS.  Weidmann is under great pressure not to be labeled "the guy that killed the EU" when in fact the EU in current form is already dead. 

Is it any wonder that gold is now smashing up against resistance again?  The blue circles in the chart below show the upper resistance line is again being tested.  If the breakout happens at this point then it will be considered a classic flag or pennant chart pattern. This pattern, should the chart break up and out through resistance, would be recognized by every trading computer on the planet.  Note from the link that the target price for a flag breakout is the length of the flagpole.  In this case, that length is about $80.  In other words, a breakout would suggest a typical price target of $150+$80=$230 for the GLD ETF.  In other words, $2300 per troy oz.

It's also quite possible that the test will fail one more time, go re-test support and then break out.  This "5 bumper" a-b-c-d-e formation would be a textbook example of the so called "horizontal triangle" as defined by the Elliott wave principle.  For Elliott wave followers, 4th waves are always penultimate waves in a series.  It would mean that the chart would likely have one more large multiyear wave up that has the same magnitude as wave 1.  Wave 1 looks like it went from $45->$100 for a run of about $65.  Since GLD is for 1/10th of a troy oz., that translates into an additional $650 being tacked onto today's one troy oz. gold price.  So, whether flag formation or horizontal triangle, a breakout from here will point to a gold price of well over $2200.  That means gold coins will probably be $2300 to $2350.

When dealing with charts, it's always a good thing to look for confirmation if possible.  When dealing with gold as a monetary metal, silver is always the first thing to use for a confirmation source.  As you can see from the chart below, Silver has been forming a flag of its own albeit with more volatility than gold.  Additional volatility has always been typical for silver because it is both an industrial metal and a monetary metal.  The silver chart has two resistance lines.  The first one is the tips of all the closing peaks.  The second one is the parallel line of interday highs.  The chart broke out of the first resistance level at point 1 below and it did so with a gap up (what I like to call "with gusto").  It then broke through the second resistance level at point 2 below.   Silver seems to be predicting a breakout for gold right now.  

Of course, charting is simply trying to make educated guesses on which way the herd will turn and herd behavior is never completely deterministic.  There is always a good degree of chance involved right up until the actual movement.  But these models are used widely and they are now embedded into computer programs and so they are something of a self- fulfilling prophecy.

If silver breaks out it could treat the flagpole length as being $48-$9 or $39.  Added to $26 would imply a target price of $65.  This is just slightly shy of my long standing view that fair value for silver is in the $75 range pre 2015.

We've had a deflationary environment for years and deflation is still the watchword for now but history teaches the deflation never lasts forever and that government will at some point succeed in ruining the money supply.  When that happens, you have to expect that cash will become trash.  At least fiat currency will.  Real money like gold and silver will never be trash because they never have been trash in the history of mankind.  It is this long standing history that gives gold and silver their value in dire times such as are happening right now.