Strong dollar rally will crush gold and stocks in 2012 amidst severe deflation

By Clive Maund
Last week saw a severe breakdown in the Precious Metals sector that is now viewed as marking the start of a bearmarket, and that means the onset of a deflationary episode that is likely to prove more serious than that we witnessed in 2008, because it will involve countries going bust rather than "just" banks and large corporations as was the case in 2008.

At first glance gold's 3-year chart still doesn't look too bad, with its price in the vicinity of a still rising 200-day moving average, but last week it broke below this average for the first time since 2008, which is in itself a serious warning, and ominous developments on the charts for Silver and the Precious Metals stocks indices, strongly suggest that gold is in the process of completing an important top area, which looks like it is taking the form of a bearish Descending Triangle.

Momentum as shown by the MACD indicator, is now firmly in negative territory, and failure of the important support level at the lower boundary of the suspected Descending Triangle will Lead to a severe decline as shown.

The dollar broke out above an important resistance level, negating a potential Double Top, as we can see on its 6-month chart below, although the breakout is not as yet by a decisive margin. This has opened up the possibility of another strong upleg by the dollar, which is of course what we would expect to see if deflation strikes.

 How far could the dollar rally? The 5-year chart gives us a good idea - it could run swiftly to the 88 - 89 area during a major deflationary episode.

 If the PM sector is signalling a major deflationary episode, then we should see signs of topping action in the broad stockmarket, and we do. A large Head-and-Shoulders top is completing in the S&P500 index, and with the index high in the Right Shoulder we are believed to be at an excellent point go short, buy bear ETFs etc

Let's stand back a moment now to consider the larger implications of all these developments on the charts. The breakdowns now occurring across the PM sector are an indication that the forces of deflation are set to assert themselves and come to the fore. These forces have always been there, lurking in the background since the first major deflationary convulsion back in 2008, and their intent is to cleanse the world economic system of the dross of the gargantuan debt and derivatives overhang that is bringing the world economy to a dead stop.

The key point to understand here is that these forces may be kept at bay for a while but they cannot be stopped - and creating even more debt and derivatives in an effort to stave off their impact, which is what central banks and governments have been doing since 2008, simply creates a more disastrous situation later on. Thus the accelerated ramping of the money supply and the maintenance of "zombie banks" and the propping up of bond and stockmarkets is an open invitation to disaster on a massive scale.

There is also a widespread assumption that that the entrenched powers that be, Goldman Sachs, the Republican Party etc are unassailable and immortal - that's what the Tsar of Russia and his family thought before they were summarily shot by the Bolsheviks in 1918. Nothing is forever.

2012 is going to suck - it probably won't be as bad as the movie "2012", but it's going to suck. Prepare yourselves as best you can

Source: clivemaund