A seminal speech was delivered a few weeks ago by President Obama at the State Department, in it he outlined a radical switch of policy in the Middle East. Such an error in judgement was made once before when Jimmy Carter suggested that we democratize Iran. What occurred was destruction of an ally in the Shah and replacing him with a purported force for democratization in the persons of the Ayatollah and the Mullahs.
Just look at what we got stuck with. Our present course in the Middle East may be a repetition of this error. There is no guarantee that what may be thought to be democratic for Westerners, may be counterproductive in a completely different arena.
Far from there being an Arab Renaissance, we may be witnessing the formation of a Islamist Spring, followed by an Arab Winter. Hope may rise eternal that American style democracy can emerge from a fundamentalist, theocratic mindset. This may be a thin blanket for a cold night. Anti American and Israeli sentiments may not be far from the surface of what is though of as a movement toward Jeffersonian Style Democracy. Suffice it to say, The U.S. may be imposing Western beliefs on Middle Eastern customs and traditions established for over a thousand years.
Such developments may well constitute exactly the opposite of what our strategists are planning. Black swan anyone? Turbulence, instability and uncertainty have usually been a prescription for precious metals and natural resources as a safe haven.
From where is all the money coming to pay for all these planned excursions? Can an already troubled financial system handle additional burdens that threaten to break the camel’s back?
We read about debt limit, budgetary woes, foreclosures, unemployment, Eurozone debt crisis, the possible loss of a AAA credit rating and a myriad of domestic travails. Shouldn’t we first repair our own home first? Sound money and a sound fiscal body is vital for our national health.
Interestingly, the precious metals and mining indices are moving higher, while the equity markets are declining showing relative strength breakouts. The Dow-Gold Ratio has shown a major breakdown through the 8 to 1 ratio. We are seeing an eerily similar setup to the Great Depression and the 1970’s where paper money such as equities are seen as less valuable than hard assets. Investors are seeking protection in precious metals due to this dollar devaluation and disappointing economic recovery. Despite bailouts, record low interest rates and quantitative easing the Dow-Gold ratio shows that the economic recovery has been ineffective and inflationary.
Gold and Silver are showing signs of fortitude during these equity sell offs maintaing its status as an authentic safe haven . A significant continuation in trend may be beginning where precious metals may move higher while equities continue to correct as investor look to hold real money over paper. This breakdown in the Dow Gold Ratio signifies major inflation and economic weakness ahead.
The S&P is showing negative divergences between price and momentum an indication of further price decline. The absence of relief rallies over five weeks in equities and the outperformance of gold indicates investors are interested to hold hard assets going into the conclusion of QE2. All eyes are on the financial markets as QE2 expires. Investors are exiting the dollar as well as equities and moving into hard assets. The market may be signaling future accommodative measures especially if the equity market continues declining.
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