Copyright Martin Armstrong All Rights Reserved May 29th, 2012

Are Commodities Preparing for a Major Rally?

One of the biggest problems with the Kondratieff Wave is how people use it and what they claim it is supposed to be doing. If Kondratieff were alive today and decided to investigate the business cycle, he would have come up with a whole different model. Why? The 19th century was simply a commodity world. The Industrial Revolution was just beginning with any practical force.

The three primary Kondratieff waves were based upon a predominantly commodity dominated economy where agriculture accounted for 70% of the civil work force in 1950 and 40% by 1900 compared to 3% in 1980. This is why unemployment rose to 25% during the Great Depression you could not pass a law to end the Dust Bowl. Consequently, those who have abducted Kondratieffs work to preach doom and gloom fail to understand that the economy is itself constantly evolving. The economy is indeed what Heraclitus of Ephesus realized that everything in the universe was subject to change: "You cannot step twice into the same stream." It is not that Kondratieffs wave is wrong or incorrect, it is merely a wave frozen in time lined up with the commodity sector that is directly impacted by war. Therefore, the peak in commodities in 1980 implied a low should have been due at least 12 years later around 1992 at best if we look at the high in 1920 and the low in 1932. Using the two previous waves, we had a decline of about 31 years. This would suggest the low would be 20102012. When we look at the currency perspective, we can also see how the next turning point on the Economic Confidence Model of 2015.75 is critical for this is the target that is 31 years from the Plaza Accord and the entire birth of the G5 that is now G20. I have been warning that contrary to the doom and gloom forecasts out there that call for the collapse of the dollar and the rise of gold right now, this is not a scenario that is quite reading for prime time. The United States is in the very BEST shape compared to both Europe and Japan. What most people do not realize is that Japan from an economic perspective is actually far worst that Greece. It is always just a matter of perception that really counts. This is why fundamental analysis fails. It is NOT what is true that matters. It is what people BELIEVE that matters!!!!!! Why? Because people buy or sell on anticipation of events to come, not of events themselves! Do you listen to a forecast that a stock will double and then buy when it has doubled? Capital moves in anticipation of events. This is why the old maxim exists buy the rumor, but sell the news. By the time the fundamental has taken place, the move is over. The key to forecasting is NOT the fundamental nonsense; it is understanding what people are looking at and what they believe will happen regardless of the facts. This is why there are bank runs. People withdraw their cash in anticipation that the bank might fail. They cannot wait until the bank fails.

So what we are looking at is a sequence of events that unfolds with one cascading into the next. It is never a simultaneous collapse of everything all at once. It is like that bankrun. It is one event moving in anticipation that sets in motion the next consequence. So the Sovereign Debt Crisis will appear when government find it difficult to see their bonds. Only then will the failure take place. So forget the doom and gloom guys that always call for the end of the world each and every time the stock market pauses. Others call for the hyperinflation of the dollar. They utterly fail to understand that hyperinflation takes place ONLY in a peripheral economy and cannot take place within the core economy. Everything would collapse long before hyperinflation would unfold. Historically, hyperinflation just has never taken place in the major economy. The closest we have ever seen such a collapse was that of Rome and there money fell by debasement and its value collapse to about 1/50th of its former purchasing power. Rome survived for about another 224 years. There were many reforms. The first came precisely on the Pi cycle 31.4 years from the start of the massive debasement of the coinage by Gallienus in 260AD after his father Valerian I (253-260AD) was captured by the Parthians. The reforms of 292AD restored the silver coinage to that of where it had stood at the time of Nero. Now we face 31.4 years from the Plaza Accord in the 2015-2016 time frame. That is when we will see the Sovereign Debt Crisis start to unravel.

The global money supply many argue is only around US$5 trillion while assets values of bonds (debt), share values, and real estate are purported to be around US$120 trillion. Then they add the credit derivatives, hybrid securities, options, futures, forwards, swaps, and OTC derivatives, and they come up with the number of over US$1,000 trillion. They then argue that today gold is really paper gold, and the market have multiplied that many times. They argue that the real gold is only about 5 billion ounces. They then argue that the paper gold depresses the price of gold and this is why it is not where it should be right now. All this sound nice, however, you can make the same argument about anything traded today from wheat to stocks and bonds given the derivative markets. Some see conspiracy behind everything. They purpose that structurally, the new Euro monetary system had been designed to withstand the complete demonetization of physical gold. They argue that it was the Euro that was the first currency to actually sever its link to gold, as well as any link to the individual nation-state. They point to the fact that the euro is neither backed by any metal or by the authority of the independent state. In Europe, they argue that gold is no longer important from a monetary point. Money has evolved and as the medium of exchange it is simply a virtual concept. It is no longer even printed for that is a tiny fraction of the money supply. Government no longer even creates money since it is electronic. So the whole idea of money being backed etc. is simply antiquated and no longer necessary. When Winston Churchill stood up in Parliament in 1925 and announced that Britain would return to the gold standard, many cheered. He proclaimed: No responsible authority has advocated any other policy. It has always been a matter of that we should return to it. This resulted in overvaluing the pound, cut off trade, and set in motion the demise of the British monetary system to the point it was forced into default by 1931. Money has become purely a virtual concept as it was in Asia from the beginning. Money cannot be fixed in value for nothing is really fixed. If you fix money then everything has to be fixed including wages. Money must float for that is the foundation of everything within the business cycle. This is separate and distinct from whether or not gold is an asset of value, which of course it is. However, its rise and fall need not be orchestrated by conspiracies. All commodities are prone to dramatic advances and declines. They do not rise in proportion to everything else nor do they rise in a steady linear fashion. Gold has not risen sharply yet simply because the world is not ready to grasp the idea that government debts are not stable. Once they realize that fact, gold will rise dramatically just as it did from 1976 at $100 into 1980 reaching $875. Such an advance today from $1500 gold would be $1,312,500 gold.

There are those who claim that there is some grand scheme among what they call the dollar faction to make the dollar supreme and the emergence of the completely demonetized gold. While this all sounds dramatic, in reality, this gives far too much credit to those in power and quite frankly the vast majority of Americans see money as the dollar. Government need not create some giant conspiracy against gold to make the dollar supreme. Roosevelt did that when he nationalized gold in 1934 and the subsequent generations have no concept of precious metals being coins. Roosevelt altered the mindset of Americans. Those that still see gold as lawful money are the non-conformist crowd, which are admirable for they do not accept government at its word. Nevertheless, the government won. They need no longer convince the majority about what is money. They want direct deposit and eliminate even paper dollars so they are sure to get every penny of taxes they demand. It is not gold they seek to eliminate, but even paper dollars! They want ALL money to be electronic and that will in their mind result in 100% tax collection. The role of gold in the future is by no means a monetary form. This offers nothing from a strategic perspective for government power. We face a Sovereign Debt Crisis and that they know. They could care less about gold and its worth. It is the DEBT stupid! That they see as the real problem. Every sumptuary law being introduced is designed to eliminate the Constitution and civil rights. They want the kill switch on the internet to prevent the youth from organizing any resistance. Why do you think they want to indefinitely detain American citizens without lawyers or any right to a court hearing?

The American specialty is to create as many laws as possible so they can ensure the power to arrest you whenever they want. Professor Harvey Silvergate wrote a book Three Felonies A Day that became a national best seller (available from Amazon). Just as the government broke up the first march on Washington led by Coxley in 1894 under the pretense he walked on the grass, which of course had absolutely nothing to do with preventing him from exercising his First Amendment Right to freely assemble and speak, they did the same for the Occupy Wall Street crown. There is always some law you will break that enables them to obstruct your constitutional rights and that means you have none.

The way government operates is that no judge will ever rule that the Constitutional Right trumps the bullshit law they will use to obstruct it. You need a permit to protest. Exercise your First Amendment Right and you will end up in jail because you did not get the permit to exercise it. They have ways to defeat absolutely every right you think you have there are none! If they want your ass it is theirs! Gold is a dead issue. It is all about money. There is no concern about gold or making money tangible. Why would they ever want to do that? Talk about a game changer politicians could not promise the moon, bribe people for their vote, borrow whatever it takes to placate the masses, and worry about who will pay the bill later if ever. Everything would have to change to make money some form of tangible wealth. How do you pay the interest on the debt alone in gold? The bankers would love that one. Whatever gold there is in Fort Knox would be gone inside a year putting aside all the stories that there is none or the bars are really gold plated tungsten. We do not need all this drama. This is NOT about gold exclusively. We are in the throes of a major economy collapse and it has nothing to do with what is money. We cannot service the debt in perpetuity. NOT even a BALANCE BUGET will stop what is coming. The proportion of interest expenditures will continue to rise while you are forced to cut spending in social and defense. You cannot cut interest expenditures without defaulting on the debt. So forget the nonsense about a gold standard. A balance budget will not even work. We are now past the point of no return.

All commodities will rise. This is inevitable. The idea that somehow Freegold will emerge as a solution is just absurd. Governments will NEVER give up power until they are forced to do so. Gold will be reduced to the barter system and its value will rise largely as an alternative to ELECTRONIC money. If you had $1 billion, and you wanted to withdraw it from a bank, the best that could happen is there will be a cashiers check. Even that is highly unlikely. The only way to withdraw that much money is by electronic transfer. So lets get real. There is no role for gold to play in the future and the whole idea of a fixed exchange rate has been attempted many times and it has always failed. You cannot fix the value of money without fixing everything else from wages to stock values. That is why all fixed exchange rates systems have collapsed after brief periods of time. What we do face is a rise in prices due to the Sovereign Debt Crisis. Nothing will take place until we begin to see pressure put on the debt markets. That has not quite appears outside of Greece and Southern Europe. The politics is already starting to shift toward inflation rather than austerity. The only check against this trend is capital. It is not FREEGOLD we should be concerned about, but free capital in general. Once capital begins to shift as it did in 1925 away from debt and toward the free markets, then we will see interest rates start to rise. As that takes place, the debt structure of government will explode.

Indeed, when we look at wheat we have the spike high in 2008. This followed the low in 1999. The computer forecast was spot on for the last 12 years. What certainly appears to be on the horizon is a rather significant breakout to the upside. Here is a chart of wheat showing the Breakout Line from the 1932 low. We exceeded that briefly during the 1974 rally. We exceeded that line for the first time closing above it at the end of 2006. That led to the spike rally into 2007. We exceeded that Breakout Line briefly in 2011 and then the market turned down. This was still quite critical for it indicates that this market is preparing for a blast to the upside. Looking at wheat indicates that what we are facing is by NO means something related ONLY to gold. When we look at the entire landscape of markets, we can see the true scope of the Sovereign Debt Crisis that we face. For the distinction between a wholesale decline in a currency value and a capital concentration that creates a bubble economy, is rather simple. The former is witnessed in all markets whereas the latter is concentrated within a single market such as the Mortgage Pools in 2007, the Internet Bubble in 2000, Russia in 1998, Japan in 1989, the dollar in 1985, gold 1980, and the agricultural markets in 1974. Consequently, what we are looking at is a wholesale advance in the commodity sector and this implies a very broad based decline in the currency purchasing power rather than a single isolated capital concentration. Thus, this is not about just gold, it is about a systemic decline in the way Western government has functioned since World War II. The 1989 turning point was the death Nell for Communism. This is now our turn with unfunded socialism. So indeed repent for the time is near. Just not for the reason a lot of people have been saying.