The Arguments for Reflation and Deflation: A Look at the Dollar, Gold, Uranium and Oil

At around the beginning of the year, I identified three fundamental “narratives” that would govern the general outlook of the market:

  1. That deflationary forces could prevail at any moment. This was the most bearish outlook, and it meant that one would chronically want to look for a major top at any moment.
  2. That the markets would price in reflation—but falsely so—for quite some time (months or more). This was a “let’s play along for awhile” outlook, and it meant that one would allow the market to act like it was going to come out of this whole mess in one piece, but knowing that the first option above would eventually take over.
  3. That somehow they actually did throw enough money (or “reserves” even, if you like) at the system that somehow we would enter a period of genuine growth. This was the most bullish outlook, and it meant that we were actually in the early stages of a multi-year bull market.

Last year I had been insisting on the first, but eventually I learned my lesson and accepted that either of the two other alternatives had some real grit. I have been toying with those latter two options ever since, letting those govern my general counts, and it’s been lovely. But, I think 3 is very unlikely now and I think 2 has probably played itself out, leaving us left with number 1.

What I want to do in this article is show how reflation versus deflation could manifest itself on the charts of the dollar, gold, uranium and oil.

The Dollar

The bullish (equities & commodities) view would likely need dollar weakness. I pointed that scenario out here. Let us review that count. I will bring the chart from that post over here.

On this count, the $DXY is in a very large correction. What I was expecting was imminent dollar weakness as it entered a third of a third to the downside (this post was from October 13th). But instead, it has only rallied since, rendering the possibility for intermediate (orange) 2 less and less credible.


So, let’s take a fresh look at it. On the prior count, I gave the benefit of the doubt to the bulls (equities and commodities) and made the assumption that cycle (yellow) b was in. But the recent dollar strength makes the 1-2-1-2 scenario to the downside look dubious. I still believe we remain in a very large correction, and everything up to cycle (yellow) a looks good, but on this new look (“Milkshake”), I believe we have not yet finished cycle (yellow) b. I believe we are presently in a triangle. Now, I’ve also taken great care to look up precisely where and when the 1985 peak occurred (since TradingView’s data does not reach that far back) and I have placed the origin of the upper green trend line where I believe that goes. So, on this count, the dollar may fuss in this area for a while before embarking on a powerful, primary (pink) wave C impulse wave to complete cycle (yellow) b. The scale and degree of this move should actually take years. That is very bear market (equities) smelling. I would not expect it to take out the 1985 peak, but it actually may if this becomes an expanded flat. So, theoretically, the sky really is the limit here.


I have a feeling that Brent Johnson is going to be vindicated.

Now, if the dollar turns down super sharply and very soon, then we should reconsider the first count. But until then, I will adopt this new count.


What goldbugs want to see is an enormous cup and handle, with us being in a nice bullish wedge or pennant up here. They would view it as a large 1-2, and we would embark on a tremendous rally soon. From my vantage point, virtually everyone believes this is the case.


That makes me very skeptical. The consensus here is inflation, inflation, inflation, too much money printing, etc. It’s such an obvious move. But there is something that has bugged me all year long. Two things actually. If you’ve lived through a couple of market tops, you kind of get the hang of the qualia of “public consensus.” It’s the Beanie Babies thing. When I see that behavior, I want to run in the other direction. And what I see here is the greatest public interest in precious metals that I have ever seen. And that is a terrible time to be long. Every day I see countless pictures of people showing off their silver and gold “stacks” online. I discussed the psychology of this briefly way back when on TradingView here. But, the point remains: when the public gets in a froth about something, the opposite is very probably going to happen. It’s rude to say, but the public masses always get it wrong.

What I am afraid is going to happen is this: people have invested a lot of their money in physical. If we enter a bad recession that goes on longer than people expect, at some point they are going to need money because they’re losing their jobs. In a deflationary environment, $GOLD will slip terribly and all that gold they’ve been buying will be sold back at lower and lower prices.

The second thing I don’t like is everyone’s bullish counts on the gold chart. Most Elliotticians wave their hands at a few things, one of them being that the move from 2016-2019 does not look like an impulse wave.

So, what I have done is I’ve gone through meticulously and recounted it, and here’s what I’ve got. The view from outer space looks like this:


And right from square one here, I see a warning. If supercycle (purple) 2 lasted twenty fucking years, how on Earth could 4 already be done? And that raises the possibility that we are in that big purple 4 even now. And so we should look for evidence of an expanded flat. And it looks pretty good.


What the bullish counts fail to do (which has been irritating me for a wile) is they don’t account for all of these triangles (green arrows). And if these are in fact triangles, then it means we have—from the 2011 peak—three waves down and three waves up. And what is an expanded flat? It’s a 3-3-5 structure. But the sheer scale of it all suggests, like the dollar above, that a multi-year move lies ahead of us. And here’s what that could look like:


Now I may not have the perfect timing on those scallops, but what I envision is an unrelenting decline followed by a long, aggravating period of accumulation, boring everyone out at very low prices. It’s also interesting that making cycle (yellow) c the length of cycle (yellow) b but from the 2011 high (giving us the “expanded” flat look), takes us to an area of great significance, a major prior high (noted in the bottom right corner of the chart above).


I was asked by a member to look at $CCJ and since my thoughts on it are almost identical to oil, I thought I would include it in this article. The bullish view on most commodities is what? That we’ve had a breakout from a multi-year downtrend line. You’ve heard me discuss this before. And with this one in particular, we have what does look like a 5-wave impulse coming out of the COVID low. So, the bullish view is that we’ve completed some “first wave” of a new and young bullish cycle. We would expect a retracement here for 2, followed by a big rally.


But, I do sense—as with gold—a large public interest in uranium. That feels very odd to me. And, as I’ve pointed out before with oil (here) and am about to again below, the whole decline actually does consist of three distinct lows. And so we may be able to count all of that as a leading diagonal. And that could very well have made the long decline merely an “A-wave” of a much larger correction:


Now, for cycle (yellow) b, we would expect a 3-wave move. And it looks like 5. So perhaps it will need some more time to complete cycle (yellow) b, I am unsure:


The point being that this will need to be watched. Does the pullback that I expect here in either the bullish or the bearish case look like a “2” or a “B” (or worse, the start of cycle [yellow] c)?


Much like uranium, $OIL has two ways to look at it. The bullish view—which I have begrudgingly accepted for some time—has us one-twoing our way into a new commodities bull market. But we really need to get going if we’re going to get going. We should be entering the 3rd of the 3rd of the 3rd and that will be unmistakable. Now, I was trying to get this article written for last weekend, and what I was going to say then was: “it is essential that we watch this trend line during this expected pullback.” The bullish view would almost certainly find it as support, but golly, Friday we sliced right back through it as if it weren’t even there. That is not a very promising sign. Losing the 250-day EMA (green) will be very grave.


The bearish view is, of course, that we’ve completed a cycle (yellow) b wave and are now embarking on a long down trend in a deflationary period:


And locally—unlike uranium—this one counts very well as a 3-wave move complete:


There is a different trend line if we treat the long decline from 2008 as a leading diagonal (red here versus green in the other), so we will need to watch that.

In Sum

I have been willing to play along with the reflation narrative all year, but things here may go either way. I have accumulated a lot of topping evidence that I’ve been sharing over the last few weeks which has tilted my bias back towards the bear camp. If the dollar continues to see strength, and the others show weakness, that’s only going to confirm the bearish view and I thought I would present all the either/ors here together so you could watch them with me as we go.

I think there is an excellent chance that the reflation trade has all been goosed by stimulus money and they may not have the political capital they need to keep doing that. A double-dip recession (with the second one being much worse) is very much on the cards here and it can all be justified in the charts as well. And what these point to is something not so short and brief.

I noted those possibilities when discussing the super-long counts on some of the tech leaders (here, here and here). The cycles we’re in suggest something multi-year, probably longer than the 2 1/2 bear market. I’m still working on what that may look like on the S&P, but I can envision something like this, based on what I’m seeing on gold and oil, etc. here: sort of a 3-year bear market, then a 1 1/2 mini-bull market (but no new highs), followed by another 3-year bear market in equities, forming a large, 6-7-ish year A-B-C correction. I really don’t think most people are prepared for that. But, that’s what these cycle c waves on these charts suggest to me.

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