Fed "Will Choose Hyperinflation Over Deflation"

Get ready for buying opportunities in gold and silver...

CLIVE MAUND has been president of clivemaund.com, since it began in 2003. He has 30 years' experience in technical analysis and has worked for banks, commodity brokers and stockbrokers in the City of London.

In this interview with The Gold Report, Clive Maund reveals why he believes excellent buying opportunities for gold and silver are in the pipeline...

The Gold Report: Clive, in a recent note on your website you said, "The general investing public are sheep, they like to move together in large groups, have a kind of vacant stare, are routinely fleeced and eventually slaughtered. That's why when they are very confident, it's time to get scared, and vice versa." 

Further to the point, you suggested that the investing public is confident in gold and bearish on the Dollar, and that those two factors could result in a rebound in the greenback and a fall for gold. Please expound upon your theory.

Clive Maund: The main basis of my theory is sentiment, during the first week of May, before the Dollar started rallying, only about 16% of the public was bullish on the Dollar — almost a record low. 

Sentiment hasn't been this bad since 2003. An article pointing this out was posted on my site on April 28. It also pointed out the danger posed by this to commodity stocks, especially to silver. 

Adam Hamilton, of Zeal Research, picked up on this too, and also is calling for a big Dollar-countertrend rally. The papers have been full of stories about how the Dollar is set to collapse, and when that happens we are usually on the verge of a rally. 

The Dollar index rose sharply from the 5th of May and has broken out of its downtrend in force from the start of the year and could get as high as 79 on this move. While this is certainly not good news for commodities, we should be presented with a major buying opportunity once the Dollar rally has run its course. 

TGR: You believe that the Federal Reserve ultimately will unleash more quantitative easing (QE3) to help prop up the Dollar. Will that be the buying opportunity you're talking about, or will it come sooner than that?

Clive Maund: Right now, it's in the Fed's interests to encourage investors to believe there will be no QE3 in order to panic them out of commodities and stocks and into the Dollar and Treasuries. This will buy it time and help reduce inflationary pressures. After the Fed has achieved this result, it will need to backpedal quickly, do QE3 anyway to prevent the economy stopping dead in its tracks and continue ringfencing the derivatives problem. 

TGR: How far off is this buying opportunity?

Clive Maund: I believe that the corrective phase in commodities is likely to take the form of a 3-wave zigzag. Gold and silver, and copper too, look to be shaping up for a tradable short-term relief rally soon, which will be driven by bargain hunting combined with oversold technicals. 

This should be followed by a more sedate decline than that of early May to a lower low than that which occurred about a week ago, which may see silver drop as low as $28 – with seasonal factors suggesting that this low may occur about late July, give or take a few weeks. I believe such a low will present a major buying opportunity.

TGR: In a previous interview with The Gold Report, you said, "As long as inflation has the upper hand, which the recent action of the commercial banks and institutions in scaling back their short positions demonstrates to be the case, investors can look forward to advancing commodity and stock markets. The big danger for investors is deflation." Are we any closer to deflation now?

Clive Maund: I don't believe we are. The fundamental reason for this is that the consequences of deflation in a debt-saturated world would be so catastrophic — especially for business leaders and politicians — that the Fed will move heaven and earth to prevent it and will even choose hyperinflation above deflation because it buys the Fed more time. 

The plunge in silver during the first two weeks of May was largely due to the successive raising of margin requirements, which was a deliberate and successful tactical move by the powers that be to pop the silver bubble that was shining a revealing spotlight on its inflationary policies, though the drop in silver also is thought to have been partly due to the market anticipating a Dollar rally. 

TGR: Let's talk more about silver. A note on your site said, "After last week's devastating plunge, the silver battlefield is littered with the corpses of silver longs with those who are still breathing being exhorted to "put their shoulder to the wheel" again by the undismayed silver cheerleaders hailing a 'fantastic buying opportunity' for the ride of a lifetime." Is it still a fantastic buying opportunity?

Clive Maund: Although a significant and tradable relief rally is to be expected after silver's brutal plunge in early May, silver is not thought to have completed its corrective phase yet. This is because a substantial Dollar rally is believed to have already started; so if you wait a little while, you should be presented with a better buying opportunity. More aggressive traders may want to play the relief rally expected soon, but average investors may want to wait for the expected lower low later. 

Silver could drop back to the high $20s before this Dollar rally is done and that should present a great buying opportunity, higher margin requirements or not. This is because inflation is expected to continue to build in the direction of hyperinflation, as QE is the only way out due to the massive debt and derivatives overhang. 

The game plan is to inflate away the debt and backstop the big Wall Street banks to whatever extent necessary because they are, as we have been told repeatedly, "too big to fail." This means gold and silver are eventually set to go much, much higher.

TGR: How should investors mitigate risk in their portfolios when the possible outcomes of our economic situation are quite dramatically different? 

Clive Maund: The two methods that we use are traded options and inverse ETFs. A word of caution about leveraged ETFs — they should only be employed where the potential is thought to exist for a big move contrary to your open positions. 

The reason for this is because they have an options component, they are prone to price erosion in a flat market. So, most of the time, it is better to use non-leveraged ETFs, which are held for only a short time until the danger has passed. Options are a simple, fair and cheap way to buy protection and thus favored — a great thing about them is that even when trading is thin, market makers have to both make a market and honor the intrinsic value of the option; this is what is meant by fair. Used in this capacity, they are not speculative at all. On the contrary, they should be viewed as insurance.

TGR: A lot of your investment decisions seem to rely on charts and technical analysis. What sort of patterns are you looking at in these charts? Are there some basic things our readers can look for that will help them find companies that are about to break out?

Clive Maund: There certainly are. The main thing you want to see is the price rising away from a clear basing pattern and the longer and more definite the base pattern, within reason, the better, and you also want to see a favorable moving average alignment. You should seldom invest against the direction of the long-term 200-day moving average — when you have this on your side your odds of failure are greatly reduced. 

There are various patterns that we employ to advantage, such as Ascending Triangles, Double and Triple Bottoms, Fan Corrections, Falling Wedges etc. and we pay close attention to trading volume and volume indicators, principally the Accumulation-Distribution and On-balance Volume lines. 

Never forget that volume is the lifeblood of the market so studying volume patterns can help you gauge whether money is flowing into or out of a stock, especially as volume action precedes price movement. Knowing this enables us to position ourselves AHEAD of breakout moves. 

TGR: You operate out of Chile. Please tell us about that country and the investment climate for mined commodities there.

Clive Maund: Chile is generally a pleasant place to live. Politically, it is stable and liberal. Housing and land is cheap compared to countries like Canada and the US. The income tax rate is low, though taxes are collected in other ways like a high vehicle road tax and high taxes on gasoline and other purchase taxes. 

The food is abundant and cheap, especially in the south of the country, and wine also is cheap and excellent. There are limitless beaches and mountains because, of course, the country is sandwiched between the mountains and the sea. There are good air and bus services up and down the country but hardly any railroads. Internet coverage is good now, too.

TGR: What about the Chilean economy, especially as it pertains to mining?

Clive Maund: Chile is actually a far more fiscally prudent country than the US. It does not have careening deficits, and the workforce is obliged to contribute to a private pension scheme that has in fact grown in value far more than government schemes in countries like the US. That means the Chilean government is not on the hook for massive pension obligations, as many other governments around the world are. Those governments will probably renege on these obligations, at least in part, by a combination of inflation and fiddling the inflation statistics.

Chile is very mining friendly and has a sophisticated infrastructure to support mining companies conducting operations. In addition, environmental factors are not such a concern here as most of the mining operations and prospects are located in northern Chile. 

The north is a rather sparsely populated desert but with towns dotted around to provide amenities, logistical support and a skilled workforce. It is still not widely appreciated that there is a line of hills or low mountains between the Andes and the coast that harbor massive as-yet-undiscovered copper-gold deposits that will be relatively easy to mine. 

TGR: Thank you for talking with us today, Clive. This has been very informative.

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