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Dr. Bernanke
is in a pickle. And when Bernanke is in trouble, we're all in trouble.
Why is Bennie
in trouble? He is in trouble because he has a debt, or should I say an
obligation to Obama for reappointing him Chairman of the Federal Reserve, the
Fed. Here's where the problem lies. In order to fulfil
this bond of duty, Bennie and his buddies down at the Fed will need to pull
off slight of hand tricks that would put the best
of magicians to shame. They will need to keep people's attention focused on
the left hand while the right
continues to do their 'dirty work'. (i.e. print new
currency and create inflation at ever-increasing rates.) They will need to
print ever-increasing currency because the hollowed
out US economy demands it, Presidential election year or not. But of
course because this is an election year, and Bennie has this debt to Obama to
make the economy appear as good as possible (so he can get re-elected), you
can expect the Fed and all their friends in the larger bureaucracy
(government, media, etc.) to work overtime creating obfuscation about what
they are doing on one hand, while keeping other fingers on the button - the
currency printing button. (i.e. think True Money
Supply [TMS] growth, unstated Quantitative
Easing [QE], and all the other sources of currency printing not accounted
for in "conventional
money supply measures".)
None of this
is new of course, it's just more extreme this time around because we are
feeling the effects of long-wave
cycles that could be far more
profound than most realize, or care to admit. We will have more to say on
this subject below once we get into the charts because they will conclusively
demonstrate that as a society we are still well embedded in denial about our
future prospects, where it's characteristic for the masses to ignore
unpleasant realities and the cold harshness of the inevitable. Be that as it
may, and maintaining our focus on what we will term more 'near-term
influences', in terms of the above, we are referring to the Presidential
Cycle naturally, the four-year cycle that revolves around the election
occurring later this year in November. Here, it is now widely understood by
almost everybody who is involved in the investing game, from institutions to
the small speculator, the effects on the economy of Fed largesse in the third
and fourth years of this period, with emphasis on the fourth year here today
given present circumstances.
What then, is
unique about present circumstances, and why is this a
pickle for Bernanke? In short, and in borrowing from subject matter already
introduced above, Bernanke's problem is embedded in the fact the US (and
larger Western) economy is dangerously hollowed out due to the
ever-increasing needs of our very mature fiat currency monetary system,
implying debasement rates must continue to rise even if this means a
parabolic trajectory. This in itself is of course a big enough pickle for
Bernanke to deal with all on its own, attempting to hide the increasing
currency debasement (inflation) via obfuscation and hand shuffling of sorted
varieties. What's more, it's this condition that will likely make it
impossible for him to deliver on Obama's debt because in order to not have
our hollowed out economy collapse prior to the election he will need to keep
increasing currency debasement rates to the point inflation becomes
noticeable despite all of the 'official rhetoric' (propaganda) to the
opposite, with gasoline prices the number one measure in this regard ever
present on voter's minds.
And as you
may well know, as it has been the source of considered discussion already of
late, no US President has ever been re-elected with gasoline prices rising
and making new highs regularly, which places both Mr.'s Bernanke and Obama in
one pickle jar, and the rest of us in others. For Obama, unless the Bernanke
can get gasoline prices back in the bottle this would likely mean no second
term if history is a good guide. And for the rest of us, broadly speaking,
such an outcome would mean even higher energy costs in all likelihood because
by implication this would infer currency debasement rates continue to
accelerate, where we know this must occur in faltering
and very mature fiat currency based monetary systems / economies. Again
however, even if this occurs don't expect the media or government agencies to
paint such a picture, as is the case at present. Expect to see more doctored
data and attempts to hide reality and persuade to the opposite, where over
the past few months the powers that be (with help from our loved financial
institutions) have been tightening the screws on the precious metal stocks
pickle jar.
This is
because they know speculators believe precious metal shares both lead and
outperform in strong moves to the upside in the sector; and if they can be
trashed, for whatever reason, even if false, at a minimum this would create
the impression (and give the Fed, government, and the mainstream media ammo
to aid their collective cause) inflation is well contained. Now I realize
this may sound 'out there' to those who choose to ignore the Fed's own
propaganda. And to an extent I can sympathize with such a view in knowing wrong headed speculators continue to furnish market
conditions that will not allow for rising precious metals prices barring
hyperinflation, where some of you may remember my previous discussions on
this topic - gambler betting practices in paper precious metals derivatives.
At the forefront of understandings in this regard, it must be remembered / recognised that until currency debasement rates trip the
light fantastic the 'authorities' will be able to continue exploiting these wrong headed speculators using High Frequency Trading
(HFT), algorithms, etc., toppling them over at key times (think expiries, key
data releases, etc.) repeatedly, maintaining the illusion inflation must be
under control with precious metals shares collapsing.
That's the pickle
jar precious metals investors are in at present, all bottled up by the powers
that be, but with a great deal of pressure building due to all the inflation,
ignored presently as it may be. This will change however, and such change can
be very rapid depending on how exhausted hair-brained speculators within the
paper based precious metals space become. (Please note the naked shorting of
precious metals shares and physical bullion supply issues are factors here
too, however at the margin, it will require a change in ETF speculator
betting practices to spark a new cyclical bull market phase in the sector.)
Given precious metals shares are both oversold and undervalued at present,
any such exhaustion should be profound once it arrives. And I can tell WHY this
will in fact be the case. This will be the case for the exact opposite reason
speculators are buying calls on key paper precious metals representations at
present, generally causing put / call ratios in the ETF space to remain well
below unity and approaching .5 on the important ones. (i.e. GLD,
SLV,
and GDX)
In this regard it's essential to realize there is generally two calls for
every put in this market presently, making the prospect of a short squeeze
impossible. And again, this dynamic is the chief mechanism by which the
authorities can conduct raids in the sector, like the one just last week at
Fed meeting time, proving to all that Da Boyz are
still in charge - or so they think.
Let's hope
they are enjoying themselves at present because one of these days, likely at
an options expiry sometime between now and the election in November, bullish
speculators will become exhausted, sending put / call ratios back up through
unity across the sector, and they will not come back into this space for
considerable time. Why? Because once November is passed they will assume
Bernanke's debt to Obama will be discharged whether he is successful or not,
and that he will back off currency debasement rates post
election as is the custom associated with traditional Presidential
Cycle related thinking. This, you see, is the forensic 'why' you can expect a
significant rally in the precious metals sector post the election. Is it
possible the rally begins earlier? Yes, it's definitely possible for a bottom
to occur prior to the election, however the best part of the rally will
likely not occur until the bullish speculators are broken, which cannot be
expected until closer to election time. To know the odds in this respect,
simply keep your eye on the open interest put / call ratios for GLD, SLV, and
GDX (GDX has the large open interest) attached above. Once they are back
above unity this will signal bullish speculator exhaustion, and precious
metals should be able to rally subsequently whether liquidity conditions
remain favourable. (i.e.
people will panic into increasingly scare precious metals in order to
preserve their wealth.)
Remember
however, the powers that be are serious about keeping gold and silver under
wraps for reasons discussed above, so don't be surprised if they use the
stock and bond markets (by altering the algos) to
give the impression deflation is the chief worry at convenient times like
this past Monday when it was announced the Indian
jeweller strike ended, which could have sent
precious metals soaring if it were not the fact they were able to contain
silver as stock market futures were allowed to slide in justifying such price
action. The cabal would of course have us believe Silver is nothing more than
an industrial metal, where lower equity prices would imply its demand would
be commensurately lower. Silver remains the cabal's whipping boy because it's paper market(s) are small and easy to manipulate.
This too will change, as constraints in the physical market will eventually
force the issue of true price discovery. It's just a matter of time before
silver breaks free of present subversive influences. At some point in the
future it will rise no matter what the stock market is doing as increasing
numbers attempt to secure their wealth in stable money.
And make no
mistake about it, increasing numbers will be looking
to secure their wealth in stable money (gold and silver) as our fiat currency
based economies continue to mature because eventually the masses will
recognize an accelerating loss in the purchasing power of the currency(s)
causing them to seek out alternatives to instability. As it stands right now,
the masses are still happy to ignore such realities because things are
manageable, however once this changes, which could be triggered by anything
from rising interest rates to skyrocketing fuel costs, a flood of new interest
will develop for precious metals, and a new reality will emerge. This thesis
is well supported by the fact the Gold / Dow Ratio (seen
below) is still essentially basing in terms of the magnitude of the ultimate
move that lies ahead. It's consolidating just above the all-important
233-month exponential moving average (EMA), which for those of you who do not
know is the most important Fibonacci number within the array in terms of
defining a secular move. Once the testing of this metric is complete, expect a
very strong surge up into long-term Fibonacci resonance related resistance,
which will of course be taken out one day as well as the masses exit the
stock market for the safety and stability of the precious metals market. (See
Figure 1)
Figure 1
This is
definitely not the case at the moment of course, where investors are still
busy bidding up tech stocks like Apple and Priceline into bubble
territory, where if there were more participants like back in the tech bubble
of 2000, the NASDAQ would be tripping the light fantastic again in aggregate.
Our meddling price mangers are doing their best to keep the excitement high
in the tech arena however, so don't be surprised if they attempt to run them
up again after a short pause here into the summer. The precious metals stocks
appear to still be well contained, which means this is the plan. Whether the
NASDAQ get through sine resistance in the NASDAQ / Dow Ratio pictured below
is quite a different matter however, because although tech stocks have been
able to make it back up into mild bubble territory, the likelihood of them
taking a stab at extreme bubble territory is not high if history is a good
guide. It would be anomalous for any market to return to such extremes so
early from a psychological perspective, although it must be remembered the
characters we are dealing with today are use to
getting their way so nobody should be surprised if they keep on trying. The
sad part of such an exercise is precious metals stocks will be ignored until
tech stocks are broken and fear of losing capital returns to the stock
market. (See Figure 2)
Figure 2
So, since it
doesn't look like this will occur until summer or fall, weakness should
remain in precious metals for some time yet, although if the XAU / Gold Ratio
(see below) were to spike down to all time double bottom low once again one
would need to wonder whether or not that was the ultimate low for precious
metals shares within the present corrective sequence. Because although the
mood in the market is reminiscent of the tech bubble back at millennium's
turn (more on this below), we have been in a precious metals bull market for
in excess of 10 years now, so one would think this might bring investors back
into the market more readily. Of course such assumptions have been quite
dangerous up until this point, where it has been a far wiser
exercise to watch gambler betting practices (as discussed above) and adjust
one's strategy(s) accordingly. Any other approach adopted by traders has been
hit or miss, at best. (See Figure 3)
Figure 3
Still, stochastics in the above appear set to hit bottom soon,
so not taking the bullish case seriously at present will likely prove faulty
thinking in the full measure of time, especially if this next picture has any
predictive value. Here, we have the Silver / Pan American Silver (PAAS) Ratio
(just one of many examples across the sector right now), which is pushing up
against sinusoidal resistance, which is the strongest such barrier within the
physical world. Now this does not mean double top matching year 2000 highs is
not possible. No no no. What this configuration
suggests is such a surge is unlikely, although prices could obviously creep
higher along the sinusoidal through time as well. The primary observation
here however should not focus on further pressure that could be exerted in
the precious metals sector (the metals outperform the stocks during periods
of weakness), but instead, investors and speculators alike should focus on
the magnitude (degree) of a bottom this suggests is forming right now, a
bottom that will be looked back on as being as important as that of 2000. (i.e. this is a monthly chart.) Naturally the big caveat
here is let's hope we don't have to wait for another (lesser degree) tech
wreck to occur before such a party begins. (See Figure 4)
Figure 4
Because much
more weakness in Canadian stocks against the Dow would not be a good thing,
where we are literally on the cusp of a deflation signal being thrown off by
the TSX (Toronto Stock Exchange) / Dow Ratio. As per above, what this means is
if Bennie tries to get too cute here and actually slows currency debasement
rates too much in order to attempt a 'fix' on gas prices he could crash our
present fiat currency monetary system / economy prematurely, where the XAU /
Gold Ratio and Silver / PAAS Ratios would break to new extremes if such a
condition was not rectified immediately. In having our wonderful financial
authorities pushing precious metals prices down right now as aggressively as
they are, what they are doing is attempting to have us believe that inflation
is well contained, and a gadget related utopia awaits us all just around the
corner. It would be quite a different picture if this ratio were to breakout,
which is what I fully expect to happen sometime later next year once the gamblers
/ speculators are properly structured for such an outcome (both precious
metals and broad market participants would be bullishly predisposed after
massive short squeezes), and the Bernank actually
does slows currency debasement rates as per tradition associated with the
Presidential Cycle. (See Figure 5)
Figure 5
In the
meantime however, expect the money printing to go on unabated consistent with
the Presidential Cycle, along with continued expectations management by the
authorities in an attempt to dampen prices at the same time. This means
precious metals shares could see additional downside unfortunately, however
if we are lucky any such price action could be both short and sharp (as
bullish paper market speculators finally become exhausted), and then filed in
the history bin. And please make no mistake about it, what you are witnessing
in the precious metals sector right now is history in the making, where all
the chicanery and price fixing undertaken by the authorities (monetary and
alike) will eventually backfire on them given the surreal market and
sentiment related extremes they themselves are creating today.
To review the
above, while it's true technical conditions in the larger companies and
precious metals indexes are not as oversold as in 2008, at the same time,
many key measures of value (if such a thing exists) are approaching levels
not witnessed since all time bear market lows back in the year 2000. What
does this mean? It means that while prices (primarily of precious metals
shares) could spike lower in days ahead (HUI to ~ 400), still, buying anytime
between now and when the bottom arrives should be considered well placed
capital by value investors, investors looking to make outsized capital
appreciation in the intermediate to long-term.
So don't get
stuck in the wrong pickle jar like Mr.'s Bernanke (and Obama), attempting to
do the impossible - and buy well-suited precious metals investments now.
Good
investing all.
Captain Hook
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