The Cost Of Money

By: Captain Hook | Mon, Feb 28, 2011
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The following is commentary that originally appeared at Treasure Chests for the benefit of subscribers on Tuesday, February 15th, 2011.


The stock market is overbought like never before and speculators are already looking for targets to buy the dip, which means whenever this thing does top, it should be profound. Does this mean stocks will go straight down when they finally top. Answer: No, this is not implied at all. It does mean that a process would have begun associated with the four-year cycle that will likely run its course however; suggestive stocks would be looking for a bottom sometime closer to the end of next year - in the neighborhood of the much-anticipated end of days targeted for December of 2012. And things might be worse than otherwise at the four-year cycle bottom because of fear surrounding anticipated trouble in 2012, which could see stocks take a nasty spill into this timeframe no matter how much soon to be pressured authorities attempt to intervene again, as they did in starting with QE1 in March of 2009.

No, this time around quantitative easing (QE) will not work like it did only a few years back because the inefficiencies created by the increasing largesse since then has become too profound. Here, while personal debt in the US has started to come down more recently, this is only because of rising unemployment and demographics (older people are less willing to take on debt), both of which are not preconditions for a growing economy. Add to this total debt, where the government has been making up for the public in attempting to keep the larger credit bubble inflated, is also at unsustainable levels now, levels that will soon necessitate either hyperinflation or deflation because of unserviceable deficits, and you get the picture, with deflation the more likely candidate to grip macro-conditions moving foreword if the bond market (or history) has anything to say about it.

Because if it's not the result of voluntary cutbacks in living standards, which is not the American way, and is certainly not the way of the lunatics running the larger fiat currency economy, the market will need to force austerity on a spoiled ruling class, bureaucracy, and larger population, and it will be the cost of money at center that will accomplish this certainty. This is of course why Treasury yields have been climbing and are triggering major buy signals as we speak (see Figure 4), along with why key players in the market have been lightening up on their holdings considerably more recently. What's more, it's not so much what's happening in the US that's the big concern anymore (but it's still a concern), but what's happening in the rest of the world, with increasing riots and accelerating (food) cost increases a potential powder keg economically if these conditions worsen.

And they might just do that because the Fed, who is reacting to worsening deflationary forces in the States, maybe forced to export even more inflation, which could send food prices (and more) soaring abroad, where already it's important to note apparently China has witnessed 400% annualized gains in just 10-days, which is approaching hyperinflationary conditions (50% per month increases), and is obviously unsustainable. So it's not surprising both gold and silver are up overnight, each breaking out of multi-day consolidation patterns, and possibly set to tack on more gains if the larger equity complex remains firm for the remainder of the week, which is what we expect running into options expiry this coming Friday. (i.e. with US index open interest put / call ratios still high, this remains the probability.)

This may change beginning next week if stock market speculators hedgers don't renew their bearish bets however, which is our expectation either this month or next based on previously exhibited bubble top behavior from the North American population. Of course because this is such a big top from a cycle perspective, which is discussed here, the turn in stocks this year might not come until later in the fall, where a corresponding bottom might not come until 2014. So it will be instructive exactly how gold performs in coming days, because as pointed out in Figure 1 below, if it cannot achieve the Fibonacci resonance related target at approximately $1500, this could be construed as a profound negative moving forward, where the words 'deflation scare' should be omnipresent in the good speculator's mind. (See Figure 1)

Figure 1

Further to this, and as you can see above, if the RSI channel on the monthly gold plot were to be broken, then, all the other potentially negative technical dispositions (think indictors and oscillators) would also be released, meaning gold would at a minimum be correcting the advance from the 2008 lows. What's more, it should be noted that despite this is gold we are talking about, and that on many scales (inflation adjusted basis, etc.) it remains 'undervalued', you don't buy charts that look like the one above, not until the indictors and oscillators have corrected considerably. And it doesn't help the bullish case indicators and oscillators are already rolling over either, where as you can see below on the monthly Philadelphia Gold and Silver Index (XAU) plot from the Chart Room, RSI has already broken down and now we are waiting to see if channel support will go next. (See Figure 2)

Figure 2

And the potential bad news for precious metals doesn't end there unfortunately (and technically), where as can be seen below, we maybe currently witnessing a breakout (break back into the structure) failure in the monthly Amex Gold Miner's Index (GDM) / Gold Ratio, which would of course be bearish. Now I am not saying that gold will not hit $1500 plus before it corrects and the gold stock to gold ratios will not blast off, where heaven knows there is more than enough new money being printed to justify such price action. However, at the same time, we know the Boys From Brazil (they are a bunch of little Hitlers) who live in New York and London don't want this, so they have adjusted the computers accordingly, and it's working because gold and silver remain way below where they should be trading right now with the larger equity complex on the cusp of potentially turning lower into a Grand Supercycle Degree deflationary event. (See Figure 3)

Figure 3

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 web site to discover more about how our service can help you in not only this regard, but also in achieving your financial goals. Along these lines, you should know your subscription to Treasure Chests would include daily commentary from either the myself or Dave Petch. As you may know, I cover macro-conditions, sector timing, and value oriented stock selection, while Dave covers the HUI, XOI, USD, SPX, and TNX technically each week. Mr. Petch is a world class Elliott Wave Theory technician.

In addition to this, you would have access to all archived commentaries, the Chart Room, exhibiting 100 annotated charts of the precious metals and stock markets, along with stock selection and sector outlook pages. 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.

And if you are interested in finding out more about how our advisory service would have kept you on the right side of the equity and precious metals markets these past years, please take some time to review a publicly available and extensive archive located here, where you will find our track record speaks for itself.

Naturally 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 and best of the season all.



Captain Hook

Author: Captain Hook

Captain Hook

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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