Monthly Gold Charts for May 2012

I do want to note that since we are facing a very similar set of deflationary factors at the current time as we did back in 2008 when the credit crisis first erupted, that time frame is an analogous year and for that reason provides at least some sort of frame of reference for a guide to price action.

Using MONTHLY CLOSING PRICES only, gold fell from a peak of $975 down to a low of $715 or a drop of 26.5% from it best monthly closing price BEFORE THE FED made clear that a round of Quantitative Easing would commence. You will recall that the purchases consisted mainly of Mortgage Backed Securities which were plummeting in value and wreaking havoc on bank balance sheets.

Fast forward to today - this time around it is Sovereign Debt out of Europe that is the culprit behind the destruction of the European Banks's Balance Sheets. Gold hit a monthly closing peak price of $1828.50. For the month of May it has closed at $1526.60 for a drop of 16.5%.

Worst case scenario would see a fall of another $183 from the current level or down towards $1344. Keep in mind however that back in 2008, the idea that the Fed would actively step in and actually buy up mortgage paper on the open market and serve as a buyer of last resort was a rather novel idea, even though it had been discussed in some circles as an academic type of matter. Now it is pretty much expected that not only will the Fed buy up such paper but also Treasuries themselves. I expect before this is all over, we might even see the Fed buying US stocks or at least stock indices.

Also, gold fell 26.5% from its peak back in 2008 while during the same time period the S&P 500 collapsed at whopping 47.7% from its May 2008 ClOSE to its February 2009 CLOSE. Does anyone really believe that the Fed is going to stand by and allow the US equity markets to lose nearly HALF THEIR VALUE before they act, especially during an election year??? I doubt it! Not when Bernanke and company are FAR MORE FEARFUL of ANY DEFLATIONARY event than they are of INFLATION.

Central Bankers are essentially confident that they can corral inflation if need be but they are terrified of having a deflationary mindset take hold. They will simply not allow the latter to happen, even if it means in engaging in another wholesale round of bond purchases and further money creation.

Again, we are all reduced to sitting around and waiting for signs of sufficient deterioration in the global equity markets and credit spreads to force the Fed to act. When they do finally sally forth, gold and silver will immediately bottom and begin to trend higher as trader sentiment then shifts away from deflation and back towards inflation.

We will also see interest rates reverse and begin rising, even if only for a while.