The following is an excerpt from commentary that originally appeared at Treasure Chests for the benefit of subscribers on Wednesday, January 30th, 2013.
You see, we do not have the same monetary backdrop as back in 2008. Back then money supply growth measures were decelerating and going down (in some cases into negative territory). This is definitely not the case today. Money supply measures are accelerating and at multi-year highs. The growth rates are not what they were in 2009 and 2010 though, which is partially what has been holding precious metals back. This is set to change as we work through 2014 however, which will be discussed further below in our discussion on the approaching hyperinflation you will need to prepare for. In the meantime, and to give you concrete technical evidence as to why the HUI will in fact eventually test the two-thirds retrace at 338 (think either this fall / winter or next year), I give you a detailed HUI / SPX Ratio plot showing that this relationship is just finishing an extended 19-month decline that should lead to a decent bounce; but, because this was only the first wave (wave a) in a larger degree a - b - c corrective sequence, we should expect more relative weakness later on. (See Figure 7)
Figure 7
What's more, and as can be seen above, with respect to the degree of a bounce to expect in the HUI over coming months, unfortunately, unless the SPX is destined for the stratosphere, it's not likely the HUI takes out existing highs at 638 established some 19-months ago now. Such a feat would require the HUI / SPX Ratio to retrace above 50% and the SPX to vex above 1600, which, as far as probabilities are concerned, is not likely using history and physics as guides. A more likely outcome, assuming the SPX tops out somewhere around 1600, which is best case scenario if the VIX is to remain within the realm of reality, is in fact a signatured 50% retrace, which again, if the SPX tops out at 1600, would suggest a move back to the highs at 640ish should be aggressively faded, given a move to 700 (as Dave suggests is possible), is not out of the realm of possibility with only slight excesses above the metrics discussed above. On the negative side of possibilities, if the HUI / SPX only retraces 32.8%, as you can see above, this would mean the HUI only makes it up to 525, as we have discussed previously. This becomes a more likely outcome the longer the Franco Nevada (FNV) / HUI Ratio remains subdued. (See Figure 8)
Figure 8
So, perhaps it will be a move somewhere in between the 50 and 200 MA's, with the 155 EMA (Trend Definer) the most likely target given it's unknown to most market participants. This is what I would expect if the FNV / HUI Ratio is not allowed to run higher in order to complete the larger degree sequence presented above before beginning a correction. Remember, it's during that correction that precious metals will be in growth mode (not income), which should propel gold, for example, well over $2,000. Time is running out in this regard if precious metals are to make a run higher before the deflationary influences expected to grip macro conditions beginning in the second half of this year as suppose to kick in, so I for one, would like to see an extension this week with all the shenanigans going on (think financial repression) - as unlikely as this may be.
Fast forward to today, and we are looking for capitulations in the above ratios this week to coincide with options expiry, seasonals, and the G-20 meeting.
So, don't forget to buy.
Good investing all.
