Battlefield Earth

By: Captain Hook | Mon, May 13, 2013
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The following is commentary that originally appeared at Treasure Chests for the benefit of subscribers on Tuesday, April 30th, 2013.

No, this has nothing to do with the sci-fi movie. It has everything to do with real life however; life closer to home, because we are living in an increasingly hostile environment characterized by both increasingly difficult and dangerous times. The wars - wars on multiple levels - are coming closer and closer to home every day. And slowly but surely - one by one - increasing numbers of people are beginning to see it because it's starting to materially affect their lives. They are coming to the realization that even though they may just be simple folks (from wherever), they are at war with extremists all over the world, including those (especially those) at home. And no amount of distraction will change such an enlightening once realized, not what Miley Cyrus is wearing out on her date tonight, not what Kim Kardashian is talking to herself about - nothing.

No, once you have had one of your limbs blown off simply because you were standing at the finish line of marathon you start to ask some hard questions, where the pabulum the establishment's mainstream media feeds us simply no longer cuts it for many, not those directly affected, or friends and relatives. Of course for most it's equally difficult to accept the extreme views of conspiracy theorists; however again, when these things come closer to home, like having the entire city of Boston locked down in martial law like conditions so that literally thousands of jackbooted Nazi like hooligans could hunt down a 19-year old kid seems a bit extreme to some, especially since this whole incident could have been manufactured. This is what it was like in Nazi-Germany as a terrified populous allowed their liberties to be stolen by Hitler's hooligans.

So American's should be increasingly worried that such incidents, manufactured or not, are getting more frequent and closer to home, because if the way Boston was handled is the blueprint for the introduction of a more permanent state of martial law to go along with our apparent state(s) of perpetual financial repression and bureaucracy emboldening, the evidence is clear - we are all in a great deal of trouble. Just wait for the banks and financial institutions to start failing to see your life savings confiscated by a bunch of corrupt bureaucrats to keep their pensions coming in. Then, like depicted in Animal Farm, it will be too late, because the pigs will unleash their dogs on you if trouble erupts. That's what the 'big show' in Boston was all about; showing you who is boss. So again, one does wonder how a couple of deeply misguided boys were able to both concoct and execute such an elaborate plan with all those special opps types present supposedly watching for just that kind of thing. It makes you wonder.

And it makes you wonder if all the new concern over the 'sleeper cell' they were apparently attached to is more of a make work project for the pig's dogs (think Animal Farm), or an actual threat to America's safety. (i.e. if the FBI knew about the boys and sleeper cell already, like 911, why didn't they do something about the situation previously?) But again, these are hard questions only a trained dog could answer correctly in all likelihood, especially if asking the wrong people. Because again, they intend to make an example of the captured boy, where he will likely be put to death. That's a blood thirsty lot no matter how justified they consider themselves, especially considering the US record abroad, which is horrendously worse. They give medals to the perpetrators of those crimes against humanity using weapons of mass destruction. This thing's got a bad taste to it no matter what really happened - it feels more like conditioning for martial law than anything else.

But this was not the only 'blueprint like' embroil we have been treated to recently. Don't forget about Cyrus, where it's already been confirmed by official sources that deposit confiscation is to be expected in the US (and throughout the West) as well, with Cyprus being the blueprint then. So it should not have been a surprise (but apparently it was) that with the intervention in precious metals last week, pushing gold and silver prices down drastically, to the point of producer breakeven, that this was met with unparalleled accumulation.

What's more, it would not be a stretch to say that in fact there is a defacto run on gold occurring right now because of increased confiscation risks all over the world, where COMEX inventories, for example, have seen the largest outflow in history because owners are worried about getting their metal back. This is especially true at present with all the rumors circulating that default is looming at the world's largest depositories.

So why is all this happening? Why were precious metals taken down so aggressively this past week? Answer: In one word, the answer is confidence - confidence in the dollar($) and status quo fiat currency economy(s), with none more important than the bond market(s). Interest rates must be kept down if the illusion is to be maintained - kept down in the US, Japan (with all the money printing going on), and even Canada, where a housing bubble modeled after that in the US is now coming unglued. Higher interest rates would put the final nails in the coffin at an accelerating rate; which again, is why we are seeing increasingly desperate measures on the part of the powers that be. Of course in the inflation perception department, if the signal thrown off last week with the Dow / TSX Ratio breaking out is correct (see Figure 5), the bureaucracy's price managers should have little to worry about for now (until next year when the deleveraging cycle bottoms), which will become painfully evident to them at some point in the not too distant future. (i.e. think deflation scare.)

In fact, it could be argued that central planners are pursuing dangerous policy direction right now (which is a ruse that those with vested interests will attempt to trade as reality), and that if they don't get a grip on what macro-conditions really are soon (meaning shut-up and start printing money with abandon), like in the late 20's, an irreversible deflationary episode could be triggered. And it's possible this risk is the reason Bernanke is leaving his post at the end of this present term; and, also could be why he is attempting to distance himself from this same post ahead of time. He now likely sees that expanding public balance sheets and artificially inflating asset bubbles is not necessarily a panacea for economic recovery. One cannot argue with the data in this respect, where key indicators (Europe too) and data points continue to show a rapidly decelerating machine. And while it's true the bureaucracy's fiat currency economy(s) may be improving from various perspectives, one must remember the sustainability of such trends is highly suspect and fragile.

This is why one must prepare now for the eventual collapse of the stock market, because when it comes - it will come fast. In this respect, no indicator is more important than the CBOE Volatility Index (VIX) at the moment because of the message it's throwing off, one where as with the pot bombs used in Boston this month, pressure is building, and it's going to blow at some point later this year (or early next). In looking at the monthly plot below, one can see that the descending and contracting triangle in the VIX is being pushed into its apex that will be hit sometime relatively soon. It could be in August, or it might take until Christmas for the pattern to complete, but once it does and the VIX begins to rally for real, all hell is going to break loose in the market(s) and economy(s) all over the world, and then you will know why this commentary is titled Battlefield Earth. Because if you think it's hard to survive now, just wait until central authorities react to plunging equity prices. (See Figure 1)

Figure 1
$VIX Volatility Index - New Methodology INDX

Bail-ins, increasing taxes, outright confiscation, price controls, capital controls, bank holidays, exchange closures, martial law - all of these things and much worse (war) will likely become reality at some point not long after stocks, commercial paper (and maybe even sovereign debt) and the larger fiat currency / debt based economy(s) accelerate their collapse(s); where again, once this process begins, it will unfold very quickly - too quickly for you to react. What to do in the case of the stock market? Obviously, the first thing one should do is sell all stocks (and bonds) you are not willing to potentially take big losses on, and if you have not already done so, exit the system. (i.e. buy buying precious metals.) And another strategy one could adopt is to short the broads when the VIX breaks the triangle's lower rail indicated above, where market dynamics will draw it back into the structure, and eventually (one of these days) see it breakout to the upside on a lasting basis as the house(s) of cards finally begin to collapse.

Of course because deflation is the prevailing macro condition right now, signaled by the breakout in the Dow / TSX Ratio (see Figure 5), which should be confirmed Tuesday (month end) with a monthly close above 2008 highs, despite what some analysts will suggest, don't be surprised if precious metals continue to fall as well, where once the broad measures of stocks begin to roll over in earnest, they will take everything with them initially. (i.e. as was the case in both 2000 and 2008.) In terms of possibilities, one must be open to the realization spike lows could see Gold go as low as $1,000, silver as low as $17, and HUI to 150 (cut in half from here). And with the deflation signal recently triggered by the breakout in the Dow / TSX Ratio, which is an important signal, the probability of precious metals moving down to these targets is quite good believe it or not. Along this line of thinking, although the lows could be seen this year given how oversold precious metals are, still, one should be prepared for a drawn out decline and bottoming process (up to 1.5 years) until the larger deleveraging cycle bottoms at the end of next year. (See Figure 2)

Figure 2
$GOLD Gold - Spot Price (EOD) CME
$GOLD Gold - Spot Price (EOD) CME

Supporting such a view, we have the Gold / Silver Ratio, another very important measure, which is back to 2008 levels with the broad markets still at the highs, delivering an ominous message, one of impending system failure, which would of course be deflationary. And make no mistake about it; such an outcome is very possible with consumers being squeezed out of existence economically all over the globe (Battlefield Earth), where dangerous precedents on the part(s) of central authorities have sent risk(s) into the Twilight Zone. So, even though one would expect such an environment to be positive for precious metals (eventually it will be), at the same time, when panic begins to hit the broad measures of stocks, rattled speculators who are still bullish and buying this most recent dip in prices (evidenced in still low and declining put / call ratios) will capitulate as well (if not voluntarily the margin clerks will get them), causing lower trajectories to be vexed. And again, as pointed out above, the specter of $1,000 gold and $17 silver, or lower, could be in the cards, with precious metals shares possibly halved from here. (See Figure 3)

Figure 3
$GDM Gold Miners Index - NYSE Arca INDX
$GDM Gold Miners Index - NYSE Arca INDX

Impossible! If you are thinking this is not possible, take a good look at the indicators directly above. They still have a great deal of potential downside left in them. There is no denying this, which is what many now impoverished speculators have a tendency to do. They have lost so much money by recklessly gambling beyond their true risk tolerances that it's easier (in the short-term) for them to remain in denial, which is why they will continue to buy calls right down to their last dollar. Many traders are just that insane today, as insane as the rest of a spoiled society gone bad.

But some will point out that with the bullion market(s) so tight, that this will eventually overpower the faulty and fraudulent paper pricing mechanisms (think COMEX, etc.) presently being used for precious metals, especially with the physical shortages now showing up noticeably on the big boys books. All I can say to such aspirations is please, realize these are only aspirations on your part (and those whose businesses depend on them being bullish all the time no matter what), and that gravity (especially true and measurable sentiment) does matter. To this line of thinking, I redirect back to the above technical points. Read them again if necessary.

In fact, and to finish for today, it's because of all the vulgarities associated with the faulty and fraudulent market mechanisms that are used to price precious metals, combined with (still) misplaced sentiment, that the risk of surprises remains to the downside (not up) - potentially big surprises - and certainly bigger than still leveraged (crazed) speculators will be able to withstand much longer.

So, continue to be humble and vigilant and you should be just fine - able to capitalize on the stubbornness and stupidity of others eventually.

See you next week.



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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