Despite this past week being an up market for stocks, the momentum toward a deeper deflationary market continued to build this week in our Inflation/Deflation Watch. The Watch closed at 129.53, down from 129.98 last week. But more importantly, our Inflation/Deflation Moving Average Intensity gauge fell to a medium deflationary reading of -2.0, down from -1.0 last week. The last time that happened was August 29, 2008, just a couple of weeks before the Lehman Brothers failure sent the global markets into a seize-up that finally caused talk of another Great Depression to no longer be the exclusive babble of crazies like your editor and other gold bugs.

Just a word about our Inflation/Deflation Moving Average Intensity measure. It simply measures the number of moving averages moving in a positive or negative direction. When we are at zero, it means that as many moving averages are up as down. When we get to negative two as we are now, it means that two of the shorter term moving averages are serving to pull the longer-term moving averages into negative territory. This is strictly a momentum measure. Nothing complicated about it. But what it does say is that the direction of prices over a very broad measure of equities and commodities is downward. Forget about what happens on a daily or even weekly basis. The trend is down and if you are a bull on equities and commodities at this time, the trend is definitely not your friend.

And that leads me still to think we could see downward prices for virtually everything, including gold and gold shares. However, as long as the “real” price of gold remains high, I see no reason to change my bullish view regarding the longer-term upward trend for both gold and gold mining shares. Likewise, more or less for silver and silver mining shares, although I do not expect silver to perform as well as gold during the darkest days of the next commodity and credit market collapse.

By the way, the move in our IDW is not inconsistent with the move we have seen in the Global U.S. Dollar Liquidity Measure pictured on your left. Although the magnitude of the move is much larger, post Lehman Brothers failure, the principle holds true. The peaks and valleys of this measure of the world’s reserve currency are roughly correlated with the peaks and valleys of our IDW. This gives me reason for concern, not only in that I fear this reduction of liquidity is likely to send markets plunging once again over into the abyss, but the sheer magnitude of the rise to a peak of 48% annual growth in liquidity may lead to the most severe withdrawal symptoms imaginable as the dollar narcotic is withdrawn, intentionally or not, from the economic patient. This is the third peak. The first one was related to the dot-com and telecom bubble. The second peak was the liquidity that caused the housing crisis in America. The third one looks to be the one that leads to the most significant of all bubbles, that being the sovereign debt market crisis. So far, only baby Greece has succumbed. But why should we think that would be the last when the narcotic being applied to “cure” the problem is indeed the cause of all this monetary and market pathology?