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They're Trying to Shake You Out!

By: Bob Loukas | Monday, February 4, 2013

If we are to believe market commentators, then Gold is being held back because
the FED's QE may be ending sooner than expected. The argument is that if the
economy improves, the FED will back out of asset purchases (QE), and the gold
bull market will end. But the FED has said it would continue to purchase assets
to the tune of $85B per month, for as long as the unemployment rate remained
above the 6.5% mark.

So the question becomes, when should would we realistically expect to see
this level achieved. In order to bring unemployment down to that 6.5% level,
the economy will need to add nearly 5 million jobs. That amount also includes
providing jobs for the first time workers entering the force.

As you can see from the above chart, we've struggled to add more than 200k
jobs in any given month. Also this business cycle is now in its 4th year and
in danger of entering into a recession. The FED has held rates at zero for
years and has implemented 5 years of QE, yet the best this economy can manage
is employment growth that barely keeps up with a rising population.

In 2013 the economy also faces some headwinds. We've moved from an environment
where the government was stimulating (spending), to one where they are cutting
spending at rates not seen since the 90's. The coming budget fights will surely
result in additional cuts; these will only serve to slow the economy further.
The end of the payroll tax holiday has already hit the majority of US taxpayers
as have tax increases on the high income earners. These newly implemented policies,
along with what will surely be additional austerity measures in the coming
budget showdown, add significant downside risk (shock) that is not adequately
priced in by the markets.

The impact of these policies was evident within this week's release of negative
Q4 GDP data. The main component bringing down GDP was a reduction in government
spending. Although this data was ignorantly dismissed "as a one off" miss,
it demonstrates that where the government had a heavy hand in this recovery,
its absence or hastily withdrawal from it in 2013 and beyond will only serve
to be a drag on employment growth.

Let's put the threat of a recession and a further slowdown in job creation
aside for a minute. Let's choose to ignore it and just assume a more optimistic
growth run rate at 200k per month. Even at this rate, we're talking about the
FED pumping in $85B per month for the next 2.5 years! That's an additional
$2.5T to add to their existing $3T balance sheet. So under "rosy forecasts",
we're looking at a FED balance sheet in the order of $5T-$6T by 2015. If this
economy experiences even a mild contraction or slowdown, then that time-frame
would easily be pushed out towards 2017-2018 where the FED's balance sheet
will be closer to $8T.

So that brings us back to the FED's support of the economy through asset purchases
of bonds and mortgage back securities. I find it almost impossible that the
FED can withdraw prematurely; especially as the economy is now feeling the
effects of the government implementing growth slowing austerity. But regardless
of the government cuts, the US will continue to rack up $1T annual deficits
that will add to the pile of $16T IOU's that have been issued. By 2017, that
number will easily exceed $20T and the US will find itself in the position
where it simply could not sustain any increase in the interest rate it pays
on this debt. There is just no way the FED could possibly withdraw itself from
the bond market at that point, as we're beyond the 100% of Debt to GDP level
and climbing. The interest burden alone will force the FED to remain active,
regardless of what the unemployment rate is.

For those members who fear an end to this great gold bull market, please put
this into perspective. Understand that the powers to be will not or cannot
tell the public what is really occurring. Partisan battles in Washington regarding
debt containment are just choreographed noises to appease the masses. We've
entered the final stages of a debt super cycle and the powers have chosen to
confront this cycle by printing more fiat to "cover the tab". By increasing
the amount of fiat is supply, you reduce the burden of debt as you devalue
its worth and raise the "nominal" price of all assets.

It's why within the Long Wealth Portfolio I stay invested in precious metals
to the tune of 35-40%. It's also why I have purchased hard assets such as income
producing property. My associated debt on this property is fixed, however the
asset value and income will rise in relative proportion to inflation. I'm not
calling for a hyper-inflationary crash, but it would be naïve not to believe
that the FED's primary goal here is to inflate all assets.

Of course we're talking about longer term themes in the above section. For
the immediate concern of our Investor portfolio positions, the Gold Cycle continues
to "spin its wheels". Any traction gained or attempts at forward progress are
quickly reversed with a rush of powerful selling. It's hard to tell what the
intermediate cycle significance of this see-sawing action is. I'm at the point
here where I just need to give up on tracking the Daily Cycle swings and focus
more of my attention on the Investor Cycle.

The Investor Cycle is only entering Week 5 and it remains under-loved with
plenty of potential to make a big run higher. But in the same breath, it has
failed to attract the type of demand needed to break out into the $1,700's
and beyond. The Cycle is showing us two very important resistance lines, which
when broken, will likely determine the course of the Cycle over the next 10
weeks.

As has been discussed before, a move above $1,700 will move the Cycle out
into new Cycle highs and clearly break the downtrend established since the
October top. A move above $1,700 should be aggressively bought. However a drop
below $1,651 (prior Half Cycle Low) and more importantly below $1,626 (last
ICL), would be a very negative development. Such a failure this early in the
Investor Cycle might well signal that this great Gold bull market wants to
put the investor through one last massive draw-down.

As for the miners, it's "groundhog day", again. All members are familiar with
the chart below, along with my usual warning that the trend remains lower and
the action is weak. Recent volumes and selling pressure have suggested capitulation,
possibly pointing to a Cycle that may have reached a significant low. But with
so many shares changing hands, we still see no price appreciation, and this
is concerning.

This as is an excerpt from "The Financial Tap" weekend premium
report focusing on the Gold Cycles. The service is dedicated to helping people
learn to grow into successful investors by providing cycle research on multiple
markets, delivered twice weekly, as well as real time trade alerts to profit
from market inefficiencies. Visit the site for a zero obligation $0.99 15 day
trial. www.TheFinancialTap.com

Bob Loukas is the founder of "The Financial Tap", a membership site dedicated to
helping traders and investors navigate the markets while increasing their
expertise and understanding. Bob has over 20 years of experience in trading
the markets, is a life-long student of economics, and has an abiding passion
for the financial markets. Much of his investment philosophy is top-down in
nature, beginning with a global and macro outlook which is used to create
a framework that drives his intermediate investments.

Bob is a leading expert in Market Cycles. His love of Cycles grew after his
introduction to the work of Walter Bressert, one of the pioneers in the field.
Cycles were a natural fit with Bob's passion for top-down analysis. As Cycles
are intertwined on multiple time frames, understanding the global outlook
greatly helps him to identify the long dated Secular Cycles. From that point
Bob is better able to identify the shorter Cycles and to build a cohesive
investment strategy. Bob's Cycle Analyzer, a software based analytical and
intelligence system, is used to predict the future movements of the major
financial markets.

Originally from Sydney, Australia, he is now settled and has been working
in New York City for the past 13 years. His background and education is in
Computer Sciences and he holds a bachelor's degree from Monash University
in Melbourne Australia. He has extensive experience in the Financial Software
area and has served as a senior executive at various Fortune 50 management
teams developing financial trading and reporting software.

Happily married with two children, family is a big part of his everyday life.
Other passions including golf and long distance running. He plans to complete
the 2012 New York City marathon.

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