Following a recent surge in precious metal and mining equity prices, Gary Savage, technical gold trader and publisher of the Smart Money Tracker was kind enough to share a few comments.

Here is his full interview with Tekoa Da Silva:

TD: Gary, you published a piece last Friday, February 14th entitled “Another Piece of the Puzzle Falls into Place,” in which you laid out some pretty big market expectations for the stock market, commodities, gold and for the dollar as well. I’m wondering if you can talk to us a little bit about that.

GS: Sure Tekoa. My overarching theme for 2014, and what is going to drive all other markets, is that the dollar would have a crisis or at least a semi-crisis probably late in the fall of this year. Last week another piece of the puzzle as you say fell into place in that the dollar broke its intermediate trend line. That should confirm that the dollar has begun the aggressive part of its decline down into an intermediate bottom which should bottom sometime in March, maybe early April.

I think that’s going to drive at least part of the bubble phase in the stock market. I believe that we are starting a final parabolic bubble phase in the stock market, and it’s kind of critical that this continue. This is an important component that’s going to drive what I call the great inflation or the grand inflation that’s going to happen later this year and it is – this particular intermediate cycle in the dollar as it drops down is also going to drive what I think will be a stealth rally in commodity markets as liquidity begins to leak a little bit out of stocks, as they get more and more overvalued. But the real move in commodities is going to be in the second half of the year.

So that’s why I think this will be a stealth rally in commodities. My guess is it’s going to last another month and a half, maybe two months until the dollar puts in this intermediate bottom. So what I’m looking for is possibly a move to – hopefully gold can break above the important resistance at $1425 and if it does, then I would like to see gold test the $1500-$1550 resistance zone before this intermediate cycle tops. I would guess that most of the commodity markets would top in that same timeframe as the dollar puts in this bottom.

Then as the dollar rallies out of that and as commodities drop down into an intermediate degree correction, I think that’s when stocks put in their last month to two months of their bubble phase where things really start to get nutty. I’m looking for the NASDAQ to test its all-time highs at 5000 or a little above 5000, and then shortly thereafter, I think the parabolic structure in stocks will collapse.

It’s going to take a collapse in the stock market for Yellen to reverse the taper and I think she will not only reverse it, but I think she will double down on QE. Instead of $85 billion a month, we may get $150 billion a month.

The problem is that when a parabolic structure breaks, you can’t put it back together. So we will get some kind of reaction bounce out of stocks like we got out of silver when the silver parabola collapsed or when the tech bubble collapsed in 2000. But it’s not going to repair that broken parabola and so all of that extra liquidity that she’s going to force into the market with QE 5 will start to flow into the commodity markets which are extremely undervalued compared to equities.

That is when I think the real spike in inflation and commodity inflation is going to begin later this summer and into the fall, and that’s the point at which the dollar crisis will intensify. We’ll get a major three-year cycle low in the dollar sometime later this fall and that will be the top. What I’m looking for is a move from – I’m going to guess that if gold can go to $1520, maybe it drops to $1350 during that intermediate correction and then I think we have a very powerful move into the end of the year that takes gold up to test at least 2000 before everything starts to move down into a deflationary period bottoming sometime in 2016.

TD: Gary, if I understand you correctly, what you’re laying out here is an expectation that the general equities markets will move up into a staggering parabolic top and collapse. And in response to that, Yellen’s Fed will come out and flood the markets with liquidity to prevent a 2008 style liquidity crisis and within the subsequent year to two years, that’s when that major move in commodities, precious metals and related stocks will occur. Is that correct?

GS: Correct, although I don’t think it’s going to take two years. The three-year cycle in the dollar is due to bottom late this year. So I think this will unfold very quickly once the stock market collapses and Yellen tries to reflate it. I think we will probably have from maybe mid-June, July, until the end of the year. I think that’s the point at which commodity markets just start to trade vertical, kind of a mirror image of what had just happened in the stock market.

Then once that happens, you’ve already got a big drag on the economy with the stock market collapsing. If you add on top of that a severe inflationary spike in commodities, then basically you have the exact same situation as what happened in 2008 when the real estate bubble collapsed.

The Fed tried to reflate it by printing a lot of money. The parabolic movement in real estate prices was already broke. The liquidity didn’t go into the housing market. It went into the commodity markets and it spiked oil to $147 a barrel. That’s what collapsed the economy in 2008. It wasn’t that the housing market was collapsing. It was the housing  market weakened the economy but it was that spike in energy and commodity prices that collapsed the economy and sent us into the recession.

I think the Fed is going to make the same mistake when the bubble and stocks pop. They’re going to follow the same game plan they did in 2008. They’re going to get the same results. Liquidity is going to flow into the commodity markets. It’s going to spike commodity prices which is going to make cost of living expenses for the average person go through the roof and that collapse is discretionary spending and that will send us down into another recession/depression that I expect will be worse than 2008 and I expect the stock market will fall below 666, sometime in early to mid-2016, as well as commodities in general. Everything is going to take a hit including gold. Gold’s next eight-year cycle low is coincidentally due in 2016.

So I think everything happens pretty fast by the end of this year and then we start that deflationary spiral down into the next recession.

TD: Gary, what might cause that deflationary spiral? If you’ve got lots of liquidity coming out of the Fed and central banks worldwide, what could be the catalyst that could cause that money to begin disappearing?

GS: It will be the same thing that caused it in 2008. Most analysts have this wrong. They think deflation first and then inflation but actually that’s backwards. It’s always inflation first followed by deflation.

Inflation creates the recession because it collapses discretionary spending. When everything you have to spend for your life, your food, your energy, when all of those prices skyrocket, well then you don’t have any discretionary money left over for anything else and that’s exactly what we saw happening in the summer of 2008 when gasoline spiked well above $4 a gallon. It has just cost people so much money to fill their gas tank, they couldn’t buy anything else.

The same thing will happen again. We’re going to get an inflationary spike. It will collapse discretionary spending. Profit margins in companies will collapse and then you start that deflationary spiral as the economy moves into recession.

TD: Gary, do we not also get political cries to bring down commodity prices right at about that same time–right before the collapse in discretionary spending or while that collapse in discretionary spending is occurring?

GS: Correct. I remember at the time vividly. The politicians were blaming the price of oil on speculators. It had nothing to do with speculators. It had to do with the Fed printing too much money, trying to stop the real estate market from imploding and if you will recall, this is at the exact same time that the government in their infinite wisdom sent out rebate checks for $300 I think it was and $600 for family.

So where did that money go? It went right into the gas tank because people could not afford to fill up their gas tank. So it just intensified the spike in gasoline prices which collapsed the economy.

TD: Gary, what’s the best way for people to play this over the next six to twelve months plus?

GS: Well, here’s how I’m going to play it. I believe that we’ve got a final bubble phase in the stock market that is going to play out over the first half of the year. Bubble phases are pretty rare and you can make an obscene amount of money in a short period of time during a bubble phase, granted they do seem to be coming more quickly over the last 14 years because the Fed just continues with these horrendous monetary policy mistakes.

But I think during the first half of the year, that the easy money is going to be playing the bubble phase in the stock market and when the NASDAQ approaches that all-time high at a little above 5000, that’s your signal. It’s close enough. It’s time to take profits. Don’t worry about trying to catch the exact top. Get out and then wait for the collapse.

Then the second half of the year, the easy money is going to be made in the commodity markets as Yellen like I said reverses the taper, starts QE 5, trying to reflate the broken stock market parabola and I think all that liquidity goes into the commodity markets and I think we have a huge spike in commodities during the second half of the year. So first half, equities; second half, commodities.

TD: Gary, what about the person that may be conservative in their approach and they’re looking to sort of maybe hopefully sidestep a lot of this wild volatility? Are holdings of physical metals one way to protect yourself?

GS: In my opinion, that is by far the easiest way to play this over the next year. It would be to buy physical gold or silver I think it’s going to produce a much better return. But the downside is the spreads are pretty large. It’s hard to sell it when you need to. You can’t get in and out as quickly or as easily as you can in the paper markets. I also think the mining shares have a lot more potential percentage gain than either – definitely more than gold but even more so probably than silver. So to make the biggest percentage gains, I think I would probably be in the miners.

TD: Gary, technical trader and publisher of the Smart Money Tracker, daily gold commentaries. Thanks much for sharing your comments.

GS: My pleasure Tekoa.

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Tekoa Da Silva,
Bull Market Thinking

Photo source.