Andy Cole's  Instablog

It’s been quite a while since my last contribution to Seeking Alpha, but amidst the vast economic turmoil, there is yet another bubble is brewing. Here’s how you can profit from it.

In order to understand the fundamentals of this trade, we need only to review the headlines of the last few months:

Stimulus headlines-
• G-20 nations pledge 1 trillion in stimulus.
• The Troubled Asset Relief Program (TARP) worth $700 billion.
• American recovery and reinvestment stimulus package worth $787 billion.
• The Term Asset-Backed Securities Loan Facility (TALF) worth $800 billion.
• China stimulus worth $586 billion.
• Great Britain stimulus worth $30 billion.
• Japan economic stimulus worth $153 billion.

Unemployment headlines (est.)-
• United States at 8.5%
• Canada at 8%
• Great Britain at 6.5%
• Spain at 17.3%
• Italy at 7.5%
• Germany at 8.6%
• France at 8.3%
• China at 9%
• Australia 5.7%

I’m sure I have missed some points here, but hopefully you get the big picture. The fact of the matter is the world economy continues to slow at an alarming pace. As jobs are being lost, world governments are introducing new stimulus packages to help pick up the slack in consumer spending. This begs the question, however, where on earth is all of this money coming from? Given the fact that the IMF just boosted its global lost estimates to $4.1 trillion, surely we don’t actually have the money to actually pay for these bailouts and stimulus packages. And indeed, we don’t.

Let’s get it straight. The money that is being printed at present is being done so with no hard-asset backing whatsoever. The Treasury has clearly been putting the risk of inflation on the back burner with the goal of getting us out of our current deflationary spiral. As a result, we’ve seen trillions of dollars pumped into a faltering economy without any real signs of inflation.

That’s not to say that inflation isn’t over the horizon, because it definitely IS. When you print money at the rate that we’re printing it, you don’t create more purchasing power. Instead, goods and services will become MORE expensive as people need more currency to pay for them. At the same time, people are actually getting poorer as wages fall and jobs are lost.

Even bigger of a problem still is the fact that nearly every country in the civilized world is flooding their own economies with currency. Add to that the tight credit conditions, bank failures, and general fear within the world as a whole, and you have all the ingredients for a terrible economic climate.

So the question remains, where can investors put money during these dark times and still earn a decent return on investment? The answer is Gold.

 
(charts courtesy of thinkorswim)

The above chart is a 9-month chart of the GLD, an ETF that basically tracks the general movement of Gold. We’ve been bearish on the GLD ever since we hit a high of $98.99 in late February. However, the downtrend that had been in place since then was broken last Friday on decent volume. We also look to have set in a double bottom at $84.5, which was incidentally an area of strong support. This chart is definitely starting to look bullish again.

(charts courtesy of thinkorswim)

A closer look at the GLD reveals what looks to be a possible inverse head and shoulders on a 6-month daily chart. Ideally, I would like to see the head come up past the 50-day moving average up to $95, before trading lower to form that right shoulder. This is more speculation than anything at this point, but if we can get back above the 50-day moving average and stay there for a prolonged period of time, odds are we trade higher from a technical standpoint.

 
(charts courtesy of thinkorswim)

And now for the kicker. For anyone that has been following our blog over at Chaudhry and Cole, this chart won’t come as much of a surprise, as we’ve been keeping an eye on it for months now. But for those that haven’t, please take notice. This is a 2-year chart of the GLD on a weekly timeframe. Upon closer examination, there is what appears to be a massive inverse head and shoulders in the final stages of forming. Given the fact that we just broke that downtrend on the daily chart, could we finally start to see that right shoulder form? We’ll see what happens, but if it does form, Gold would be on the verge of an absolutely massive break above $1000.

All we can do at this point is and see if it happens. A break above $1000 in Gold would seemingly correlate with another leg down in the stock market, not to mention a crash in the dollar, both of which I believe will happen. Over the next few years, the S&P is likely to retest and break through the lows set last March before continuing on its way to an eventual level of 600 or lower. But I guess we’ll take this rally while it lasts right?

Good luck to all.

I have no current positions in the companies disclosed.