Gold has always been a major indicator of things  to come. It forecasts inflation, deflation, growth, and recessions, to say  nothing of geopolitical tensions. This last week as a whole was uneventful. But  things looked a lot better by Friday than they did the  previous Monday. The amount of negative news at the start of the week  affected all markets, especially the stock market, but by Thursday the forward  looking data began to turn up. China's PMI came out higher than expected,  cooling fears of a continued slowdown there. The Leading Economic Indicators  moved higher in the US, quelling fears of a further downturn here. And home  sales turned up in the latest report. The result: a higher stock market  and higher commodity prices across the board.

Almost all the indicators I follow are trading  at prices they have been at for weeks, or higher. Gold is trading around  the 1300 level, right in the middle of its 1200-1400 range for the year. The  CRB is trending up at 308. Copper is $3.17 -- well above 3 bucks and holding  its upper range. Oil just broke higher to $104. And the dollar index is 80,  about the same as it has been for months. The stock market, for all its claims  of hitting new all-time highs, is actually only up .02% for the year.

The jury is still out on which direction we will  eventually go in most markets -- there's still no trend. Bob Pisani of CNBC  said this week that he's been talking to traders on the floor of the NYSE, and  almost everyone is complaining about this choppy market that is chopping up  traders like never before. He went back 5 years, and this is the only year to  date that there is hardly a move up or down -- just up AND down day after day  after day. You can make money on a trend up and you can make money on a trend  down, but you can only lose money in a market like we've seen recently if  you’re a trader.

That’s what has happened with gold. What was a  stellar run in gold in the first 2 months of the year, in which we ran up 200  dollars and which led to excellent profits in PM stocks, has turned into a  choppy trading pattern with no trend. Gold has leveled off into a tight trading  range and is waiting. But waiting for what?

I have expected gold to rise this year along  with most other commodities and so far that forecast has been correct. I expect  the move to last years, as long as it is inflation and growth that we face and  not the reverse. My gold call was made in December of last year when gold was  $1180 and most were predicting it would fall to a $1000 or less. The call was  predicated on an economy that even after a steep fall in the first quarter  would come back and move smartly higher the rest of the year. This I  believe will lead to an increased demand for commodities and rising prices.

In this choppy market, keep in mind that the  rewards can be huge going forward for resource stocks which are now  selling at a fraction of their price versus three years ago. But as always  let's not forget the other side of the coin: a renewed bear market in gold.

I am constantly reviewing data and my own  theories and premises. If anything, I'm usually the first to question my own  predictions and focus constantly on what can go differently than my  expectations. As a trader I always have a plan ‘B’. This is especially  true today as I'm starting to get concerned that we may not have a second half  rebound as I've been expecting. Two new pieces of information worry me: First  is the reemergence of new fears of deflation in Europe. Expectations are  running 3 to 1 that deflation will take over soon and a deflationary spiral is  imminent. Expectations  have a way of turning into reality. And fears of a new financial crisis are  rising as Central Banks jaw-bone but do nothing as economic growth turns down  once again in several countries. Central Banks, it is feared, are  falling further and further behind the curve.

The other concern is this:

Notice that the money supply direction is  turning down -- not up as all the other years shown on the chart. This could be  a foreboding sign of things to come.

So far, my thesis that inflation and growth  would rise this year has been correct. In the US there is mounting evidence  that GDP will snap back perhaps to a 4% rate in the 2nd quarter. And inflation  rates are higher right now than they’ve been in years. Copper, oil, gas,  shelter, and food are all up sharply from their lows, confirming increasing  growth rates and demand for commodities. But it's the future that is worrying  me -- the second half of the year. Money supply is moving the wrong way  and inflationary expectations could be peaking right here.

In all the other years shown on the above chart,  money supply slowly rose consistently as it should -- and still we saw  inflation rates decline from 2-3% rates to .07% last year. Now we see money  supply falling. This is potentially deflationary. It may work out  that a falling rate of money growth is a good thing, occurring just when we  need it if inflation continues to rise and could act to counter  future inflation -- but that's hope, not evidence. If both  inflation and growth fall from here over time, it will be exasperated by a  falling money supply.

Meanwhile, growth has increased in Europe,  but it is only running at about 1%. That's better than falling 1% as it  had been, but it's a pretty thin buffer against recession. And the  inflation rate in Europe has risen to .09%, but again, that's only up from  .07%. There's only a short way back to deflation. So we’re still  floating in limbo with no real momentum anywhere in the world.

As I've expressed to subscribers at my Market  Update Letter at paulnathan.biz, I think we're getting closer to knowing  exactly which direction we will move -- up with more growth and inflation  or back to the recession/deflationary bias of the past. I suspect that will  become clear this summer. Gold expresses this view eloquently: poised in the  middle of its range, ready to move either way...

Stay tuned.

Paul Nathan
Paulnathan.biz