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By Eric Pomboy of Meridian Macro Research

August 21 (King World News) - Gold Battle Near Key $1,370 Level - Charts Of The Day

Taking a look at the Gold relative to Net Commercial position chart, we find that the 22% bounce (same for 2005, 2008 bottoms) we highlighted late in July has resulted in a full snap-back into the (bullish) trend line.  As such, we should not be more than a week or so away from some sustained moves higher for both gold and silver.

When looking at the 2005 and 2008 Gold rebound from lows, each resulted in a 70-72% rally,but that was just a mid-point in the overall trend before the next major correction.  The longer term trend shows the 2005 rally ended in 2008 with a total move of +250%.  When looking at the full breadth of gold’s rally from the 2008 low to the 2011 peak at $1900, we see a similar +260% move.  The extended chart below shows what we may see going forward and, if past is prologue, sometime in 2016 gold could reach roughly $3500/oz.

Turning to Europe for a moment; In late March of last year, some MSM commentators declared that Europe had decoupled from the US and was firmly out of recession with nothing but clear skies ahead.  In the 3 weeks following those remarks, the STOXX Europe 600 Index had dropped about 12%.  The same was being said last week -- that Europe is out of recession and smooth sailing is ahead....

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In response, we wanted to offer a chart which illustrates there really is no such thing as ‘decoupling’.  As you can see (chart below), where the US goes Europe will follow (and vice-versa).  With ‘taper’ fears mounting and US data likely to soften in coming months, a Europe ‘decoupling rally’ seems highly unlikely.  For now, it looks as if both are headed further into negative (3 month change) territory.

With GDP and employment indicators coming up in the next couple weeks, we wanted to give a sense of what the data may show.  First, GDP is clearly in a weakening trend which will likely continue given the lackluster employment picture and tepid business conditions/activity.

With regards to employment, full-time vs. non-full time employment data for August will be in focus.  If there is a break further below the trend line (which we expect to see), there will likely be trouble ahead (see: previous two trend breaks).  The negative effects on growth and spending that go along with higher temp/part-time vs. full-time employment are many.  In sum, if the downtrend continues for full-time employed, GDP growth will surely follow.

As well, Manufacturing Employment flat-lined y/y in the latest reading.  Negative y/y growth in manufacturing employment is historically a bad sign for GDP.

The Treasury International Capital Flow (TIC) data were especially dismal if you didn’t get a chance to sift through the release last week.  Of note:  Net Foreign Purchases of Treasuries hit record low of -$40.8 billion for the month.  On a 12 month sum basis, net purchases are $105 billion, down -$689 billion from the Sept. 2010 peak.

The TIC data bring back into focus our chart of Fed Purchase of Treasuries (12 month sum) relative to Net Foreign Purchase of Treasuries (12 month sum).  One month ago, with the ratio at 1.54, we suggested the line would spike as foreign buying begins to dry up, leaving the Fed increasingly looking as buyer of last resort.  The data do not disappoint.

Also of note in the TIC report: Japan Holdings of Treasuries (12-month $billion change) have now gone negative (-$25 billion) for the first time since 2005.

In looking through all the macro data, everything is pointing to a stalling economy while at the same time foreigners are clearly losing their appetite for our debt.  This is not a good cocktail, which points to one thing:  The Fed will have no choice but to continue asset purchases for an indefinite period, or risk having to come back in to rescue the economy after a failed ‘trial taper’ period.  Will it be too late then?  Does the Fed really want to find out?

With our final two charts, one thing seems clear:  The stage is set for a surge in inflation going forward.  Zero Maturity Money Supply y/y looks to lurch higher bringing CPI (and precious metals) in tow.  As well, the 30-Year rally in bonds looks as if it has come to an end, and the value of US gold reserves will soon begin to catch up to our ever-expanding Monetary Base.

© 2013 by King World News®. All Rights Reserved. This material may not be published, broadcast, rewritten, or redistributed.  However, linking directly to the blog page is permitted and encouraged.

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