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October 06, 2008

A Calamity Of Errors
by Captain Hook

The following is an excerpt from commentary that originally appeared at Treasure Chests for the benefit of subscribers on Wednesday, September 17th, 2008.

Between Lehman Brothers and the AIG bailout, Western central banks have already printed somewhere in the neighborhood of half a trillion dollars this week, and it's not over as Washington Mutual, amongst others, are said to be up next. While undoubtedly being a record for such largesse, because these measures are simply monetizing bad debt of insolvent companies, as pointed out previously, the effect on the consumer's liquidity condition is minimal. In fact, when you add up all the stock market losses, amongst other things, the average investor remains worse off, and deteriorating.

Couple this with the bureaucracy's (Fed and Treasury) attempt to appear 'neutral' in front of the presidential election, which means they wish to do as little as possible to directly affect the economy for fear of being accused of favoritism, and you get a 'recipe for disaster' for continued upheaval before you in the financial markets today. Oh yes, there's one more important factor. Investors are becoming increasingly bullish due to the obviously unfounded belief that the bureaucracy will not allow anything bad to happen before the election, as expressed by falling open interest put / call ratios on 90-percent down days, seen Monday.

You could not make this stuff up if you tried, even in Hollywood. If you did, the best title for the work I can think of is 'a calamity of errors'. As mentioned yesterday, once you head down the road to socialism, after a while the moral hazard this engenders allows the bureaucrats to take 'unlimited license' in monitizing every problem that comes along until the system is broken. Then, like Humpty Dumpty, we all fall down together whether you are a responsible saver or not because your wealth has either been confiscated or exported by the bureaucracy.

In terms of a prognosis moving forward, in spite of the bailouts, complacent attitudes on the part of the investing public in the face of present lunacies ensures that stock markets will continue to fall, with losses possibly exaggerated as misplaced hopes associated with all the bureaucratic ease going on these days rightly snaps in favor of fear upon seeing continued failures. This is why we remain cautious on more immediate prospects for precious metals despite increasingly bullish fundamentals; fundamentals that once unleashed during more sane days, will end this mid-term correction in gold and silver.

In the meantime however, and again, as discussed yesterday, because stocks and commodities are likely to remain under pressure due the 'calamity of errors' discussed above, precious metals shares will face further losses set against continued buoyancy in the dollar ($) due to unfounded 'safe haven' buying, which in turn is what keeps a lid on gold and silver. How long will this last? Two things need to happen in order for precious metals to take off again. First, we need to see equity markets stabilize, which will happen after the election in November for two reasons.

First, once the election is passed, investors will not be so complacent about future prospects in the economy and start betting that way in options / futures markets, which will bring the 'perpetual short squeeze' dynamic back into the market. And second, which is the other ingredient necessary to sponsor such a short squeeze, with any luck the M's will start reaccelerating higher, meaning liquidity will be getting through to the little guy again (not just these monetizations which do little to help a cash strapped public), which will lift all equity boats, allowing the $ to fall.

How do we know the M's should start to feel the benefit of all the largesse occurring? Answer: As thought previously, and now becoming a reality, with accelerating problems in the financials, the Fed is being forced to increasingly accept questionable securities in exchange for its quickly dwindling portfolio of Treasuries. So, at some point in the not too distant future it will be forced to begin printing more money to continue these efforts, which in turn will positively affect the M's. Or in other words they will no longer be able to hide their inflation through covert monetizations and swaps, which means that increasingly, the largesse will finally hit the books.

And again, expect this process to begin in earnest for the reasons mentioned above after the election in November, where until then, pressure will remain on precious metals markets. How do I know this for sure? Answer: Because the charts tell me so, encapsulating all fundamentals / factors into telling pictures. Let's take a tour of charts I was working on over the weekend, where because they have not changed in substance over the past few days, will suffice for this analysis.

The first chart to be viewed and discussed is a daily plot of the Amex Gold Bugs Index (HUI), where upon close examination of indicator technicals, despite most people's perception that precious metals stocks are 'extremely oversold', one can see that in fact this is not the case. What's more, if we are correct about the prognosis for RSI on the daily plot pictured below, the present test should resolve downward in a diamond break to join all the others in the sector, sponsoring a move into the 225 area, which would be the customary Golden Retrace so often seen in precious metals markets. (See Figure 1)

Figure 1

Unfortunately we cannot carry on past this point, as the remainder of this analysis is reserved for our subscribers. Of course if the above is the kind of analysis you are looking for this is easily remedied by visiting our continually improved web site to discover more about how our service can help you in not only this regard, but also in achieving your financial goals. For your information, our newly reconstructed site includes such improvements as automated subscriptions, improvements to trend identifying / professionally annotated charts, to the more detailed quote pages exclusively designed for independent investors who like to stay on top of things. Here, in addition to improving our advisory service, our aim is to also provide a resource center, one where you have access to well presented 'key' information concerning the markets we cover.

On top of this, and in relation to identifying value based opportunities in the energy, base metals, and precious metals sectors, all of which should benefit handsomely as increasing numbers of investors recognize their present investments are not keeping pace with actual inflation, we are currently covering 70 stocks (and growing) within our portfolios. This is yet another good reason to drop by and check us out.

As a side-note, some of you might be interested to know you can now subscribe to our service directly through Visa and Mastercard by clicking here.

And if you have any questions, comments, or criticisms regarding the above, please feel free to drop us a line. We very much enjoy hearing from you on these matters.

Good investing all.

Captain Hook
TreasureChests.info

Treasure Chests is a market timing service specializing in value-based position trading in the precious metals and equity markets with an orientation geared to identifying intermediate-term swing trading opportunities. Specific opportunities are identified utilizing a combination of fundamental, technical, and inter-market analysis. This style of investing has proven very successful for wealthy and sophisticated investors, as it reduces risk and enhances returns when the methodology is applied effectively. Those interested in discovering more about how the strategies described above can enhance your wealth should visit our web site at Treasure Chests.

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