I’ve hated the Keynesian stimulus the entire world has been deploying since markets collapsed in 2008, but my reasons have evolved.

First, I was worried that it was a knee-jerk reaction. We were in such a hurry to prevent “damage” to the economy, and it was obviously extremely politically popular to dump government money on the worried masses. I was afraid that instead of taking our medicine and allowing the bubbles in housing and equities we all participated in and all benefited from deflate, we were hurriedly dumping borrowed money back into the system.

Later, as I learned that this response to crisis was well thought out by Keynes back in the Great Depression days, my initial fears subsided slightly. This is a true economic theory, not a knee-jerk reaction. By then, I’d learned more about economics, and my fears turned to inflation and malinvestment. Borrowing money to increase future economic output can be good for the borrower, whether the money is borrowed by an individual to buy a car to travel to a lucrative job, by a company to expand production, or by a government to invest in infrastructure or research. Borrowing money to invest in consumption, however, takes away capitol from the future. Borrowed consumption has to lower future consumption, or worse, future investment. My worry was that the stimulus was funding consumption rather than true investment. The Credit Writedowns blog seems to carry this tone - that stimulus can be good in theory, but that we’ve spent it in the wrong way and will pay for this in the future. Acoording to Keynes, that doesn’t matter. He said that burying money for people to dig up would be better than nothing. I haven’t thought it through as much as Keynes apparently did, but something about that bothers me.

I think Andy Xie hit on a big part of it in his recent comments. In Japan, the government’s efforts to stimulate the economy resulted in inefficient corporations staying in business despite loosing money for decades. Joseph Schumpeter is known to have called depressions “a good shower for capitalism,” and I think that is a good analogy. Companies get too big, too old, and too stiff. A crashing bubble cleans out all the companies that don’t have a solid balance sheet, strong leadership, and the flexibility to adapt to a rapidly changing market. Providing stimulus keeps these lumbering giants hanging off our backs when innovation only awaits their downfall.

My thoughts are still evolving as I see the longer term effects developing and I learn more about economics, but I still think the stimulus will turn out to be a bad idea, and I think Andy hit on a big part of what I think we’ll come to regret.

In discussions with peers recently, I’ve often said that it is ironic that sovereign debt concerns were pushing commodity prices down. Everyone was busy dumping the Euro and exchanging into dollars because of all the talk over Greece and other Eurozone nations with unsustainable debt levels. The crazy thing is that the dollar isn’t really that much safer. Our own debt levels are far above ideal, and our government budget plans don’t show our deficits coming under control for several years. We just reappointed a Fed chairman infamous for being willing to inflate our way out of possible depression. Foreign countries are reducing their holdings of our debt during a time when we are going further into debt than ever in our entire history. Our banks are still holding tons of toxic assets that could do a lot of damage and our financial system is still under-regulated. These are the exact reasons that create a strong fundamental case for precious metals as a safe store of value, and sovereign debt concerns should tend to push metal prices higher, not lower.

The dollar rallied most of last week. About mid-week, it seems the market started to see things my way. Gold and silver started to rally weakly, even as the dollar continued to make visible gains. Over the weekend, the market seemed to take a break from worrying about the Eurozone, and the dollar responded with a slight decline, sending metals up.

Now that metals are finally rallying, what should we expect this rally likely look like? Looking at the SLV ETF, today’s rally was stopped by resistance at $16. SLV opened with a big jump in price and ended with volume slightly above average. During the course of the day, SLV managed to close the gap created on Feb 5th. There isn’t really enough volume to call today a breakaway gap, so it’s probably is mostly a continuation gap from the rally that started on the 8th. It’s also probably partially a false gap. Since the market was closed for a long weekend, there was likely some pent-up price action that affected the market today.

Let’s disregard the panic selling of the exhaustion gap on the 5th. From the bottom on the 8th to the bottom of today’s gap is about $.80. Projecting that upward, we get a conservative target of $16.60. This gets us past resistance at 16 and falls right under the next likely resistance zone of 16.50-17 created by the long December consolidation, so that seems like a valid target. Resistance at that level could be strong, and we will probably need a consolidation at that point. There’s nothing I can see just yet in the technical indicators for silver that makes me think it should break through such strong resistance without a fight. Looking at DXY, the dollar has support at 78, and there’s no reason to think that won’t hold at this point. Looking at the UUP ETF, there hasn’t been enough volume yet to make me think the downturn will last any longer than a regular correction and the medium-term trend may still be up.

In contrast to silver and the dollar, there are some things on the gold chart that give me some hope for a sustained rally. Looking at GLD, it traded in a small range today that created a decent gap upwards. It stopped just short of resistance at 110, which is it’s December consolidation zone. The good news here is that if this does prove to be a continuation gap, the math puts our target at about $114.20. If GLD can reach that level, it would be through the December consolidation zone and the next resistance level created by the interim top at about $111. In fact, there is very little resistance between $114 and the previous top at $118. A rally that strong in gold should eventually take silver along for the ride.

I think we are safe in betting on a rally to somewhere around $16.80 on SLV. After that, we’ll be due for a consolidation. At that point, we’ll need to be defensive. Unless something happens to change the market’s mind and move them away from the perceived safety of the dollar, SLV may not be able to make it through resistance there. We’ll have to keep an ear to the ground to see where the market will head next at that point, but gold’s behavior makes me optimistic the rally could continue to previous highs.

Back on the 15th, I tightened my stops pretty tight after predicting a local top in silver, and prices started dropping soon afterward. That call turned out to be pretty good, getting me out of SLV within a few percentage points of what turned out to be the top.

I’m much more nervous about predicting the bottom than I was the top. The problem is that my (small amount of) experience with precious metals is that once they turn the corner and head back up, they do so sharply. I’m afraid that will make it difficult to be sure the bottom is in without missing the initial breakout. However, we can’t let fear guide our investing decisions, so we have to take the information we have and make the best prediction we can. Once we see the numbers, we can compare them to the price behavior and see if we see an opportunity to get back in.

…And get back in we should. The fundamentals of metal are still very favorable. The world economies remain weak, and many countries are debasing their currency. The stock market is highly overvalued, and metals remain historically undervalued compared to stocks. The weekly chart shows we are still roughly within a rising trend channel and MACD is still positive. I’m fairly certain we are still in a secular bull market for precious metals.

On Jan 20th, there was a pretty clear breakaway gap to start the down-trend. On the 24th, there is what looks like a continuation gap. Measuring from the breakout to the continuation gap and projecting down, we get a target of 15.75. The previous corrections in March and June were 15% and 20%, respectively. A 15% correction from the Dec 2nd high of ~$19 would put us at $16.15. 20% would put us at $15.20. That makes 15.75 seem like a reasonable target. It seems the current price of 16.26 likely has a little further to fall. Support is strong at $16 from the Sept and Oct bottoms and the June top.

The RSI is currently at 50. During the previous 2 corrections, it broke below 50 briefly before turning up. Yesterday the price went down on solid volume, but closed higher than it opened. Today it went down on low volume. Both seem to indicate confusing in the trend. The MACD histogram is still falling, so downward momentum isn’t slowing just yet. The STO has hit overbought territory and is bottoming out, so we do need to be on-guard for a change in momentum.

The dollar is still rallying, which will continue to pressure everything priced in dollars. Looking at the Kitco gold index, the index has started pulling away from the dollar value, so gold (and likely silver with it) has started to have some “price-stickyness” and is not falling in price as quickly as the dollar is gaining in value. This equates to a net gain in value for metals, even as the price drops. That should certainly give metals some inertia upward if the dollar heads back down, but it doesn’t appear to be a big enough departure for metals to rally alongside the dollar yet.

Speaking of gold, there are a few clues there as well. STO has bottomed in oversold territory and the slope of the MACD histogram is starting to turn up. GLD moved pretty high in intra-day trading today, despite closing down on relatively normal volume. This is a sign the bulls could be gaining power.

The dollar rally looks healthy. Like I said, I don’t think metals have the power to rally alongside the dollar right now, so the turning-point of the dollar will be a critical point for metal as well. The MACD is above its trigger line, and the slope of the MACD histogram is weakly up but steady. Looking at the UUP ETF, volume is still much stronger on up days than down days.

Conclusion: I’m looking for a silver bottom between 16.15 and 15.20. It will probably be on the higher side of that due to the strong support at the $16 level. We’ll need to keep a close eye on the dollar to see when the uptrend will really take off, since an uptrend will likely be weak (or more likely non-existent) as long as the dollar continues to rally.

Nintendo has been in a general downtrend for a while now. In December, it started rallying pretty quickly on news that the Wii was outselling the PS3 during the holiday season and then news that the Wii will get Netflix streaming videos sometime soon. I actually called the top at 35.40 the evening after it closed there. The huge rally had made it overbought no matter what indicators you looked at, and that day’s volume looked like a text-book exhaustion gap to me. Since then, it has headed steadily lower.

My target for the movement was 34.50 - down $.90 from its top. I picked it as the 1st Fibb retracement of the gains. Today, it went below 34.50 during intra-day trading and closed just up from that at 34.82. Reviewing the chart today, I think it will go much lower than my initial call. Most of the indicators are still overbought, and volume is picking up as it heads down. There is some support at 34 from the continuation gap that happened there during the rally and the Sept top, but it is looking like it has the momentum to close that gap. Support is better at the bottom at that gap around 33, which was also a top in both Oct. and Nov.

I actually tried to trade on this one but my broker couldn’t get shares for me to short. That’s the disadvantage of using a discount broker, I guess.