The Last Laugh
The following is commentary that originally appeared at Treasure Chests for the benefit of subscribers on Monday, March 7, 2016.
There's an old saying - he who laughs last - laughs loudest and longest. Applied to the financial markets, and more specifically those markets that represent man's innovation (stocks) set against those grounded in more earthly concerns (commodities), in looking at the situation right now, it appears we are at point of 'peak optimism'. Those in a position to truly benefit from the trend of innovation capitalization are laughing right now, with the oligarchs (tech savvy rentiers, wealthy speculators, etc.) and top-level bureaucrats cashing in 'big time'. Unfortunately for just about everybody else however, those locked out of this game, more earthly concerns are becoming an increasing concern because of blowback pressures associated with the easy money these characters have been paying themselves, threatening to send commodity prices much higher, led by precious metals.
So although the lofty thinkers that tend to dominate the corridors of commerce these days may think they are still laughing right now, it should become apparent to these types that as time marches on, and the effects of their debasement policies continue to multiply, the future may not seem so certain, the laughs not appropriate - the true costs of malinvestment, misappropriation and fraud all too real when such policies are curbed. And curbed they must be this year, and US Presidential election year, which is considered 'proper etiquette ' not to show favoritism in front of the vote. That's right - the hands of the debasers are tied - so all the paper empires are coming unglued. What's worse, with Donald Trump an apparent 'shoe in' for the Presidency, and his stated goal to audit the Fed (chief debasers), perhaps now is not a bad time to consider why gold will have the last laugh in good time.
Thusly, perhaps you can better understand gold's resilience in the face of continued suppression in US markets now, with official selling in the futures markets becoming increasingly desperate as 'things' continue to fall apart. Negative rates, a cashless society, and the Donald (Sanders?) are all reasons for central planners to attempt to keep the genie (gold) in the bottle using this means given they can't make things 'magic' this year via more steered QE, not that this would work this time with so many people out of work now. Add to this the establishment coming unglued with either Trump or Sanders displacing the status quo, and again, it's no wonder gold is going up with new audiences seeing the necessity to own it every day. (i.e. even the status quo will realize this eventually.)
And then you have the stock market - and it's precarious situation - something that might become an issue as early as March again. As you will remember, in forecasting a low in stocks last month, at the time we stated with the decline from November to mid-March taking approximately 3.5 months, a one-month-plus rest in the trend should be expected, and sure enough we are now three-weeks into the recovery, looking for an important top in stocks sometime in the second half of March, perhaps a little earlier. Next week we have the Fed Meeting, which can often mark a turn point depending on how traders react to the policy. The fact an options expiry occurs the same week increases such probabilities. Of course given credit market conditions, the mania in junk, and stock market internals, not to mention Europe is imploding, who knows how long the bounce will last.
In attempting to answer this question, and an observation made last week, it should be noted the Dow / Gold Ratio (DGR) is in the process of carving out what appears to be a standard a - b - c correction higher that could define the extremities of the counter-trend moves in stocks and precious metals, which if true, paints a very bullish picture for the latter. The larger trend is bearish for the DGR of course, which can be gleaned by studying the monthly plot below. In this regard, one should note the monthly close below the 'trend definer' last month, the MACD trend-line break, and the fact important stochastics have also turned lower. As pointed out below, people are now (basically) abandoning paper now that punitive asset confiscations are becoming more aggressive, with negative interest rates (NIRP) front and center. (See Figure 1)
In terms of triggers to cause another push higher in the DGR to end this consolidation, it's difficult envisioning the Fed not taking advantage of recent strength in stocks to talk hawkish next week (or tighten?), which should have the effect of causing stocks to surge and precocious metals fall. Despite all the rhetoric, the Fed needs to keep the dollar($) strong if it's going to take interest rates negative (accounting for the need for a hawkish posture), which remains a distinct possibility depending on what happens to the stock market. With the DGR turned lower now we know the path of least resistance is in fact down for stocks, although you would never know it because they still spend most of their time going up because of all the intervention. That tells you the seriousness of the situation in our asset dependent economy.
A subscriber wrote in last week, "The XAU has ran away from the bottom in stellar fashion. I have been chasing this rally for 3 weeks now committing some capital because the pullbacks we get only last a few hours or a day. I still have 80% of my cash ready to go if we ever get another sell off. You're thoughts????"
I would estimate this subscriber's situation is quite common, myself included. You never want to commit 100% of capital anyway, however most traders remain under-invested and wary of the potential for a 'sell off', which is the hallmark sign of a bull market - the hesitation - or 'wall of worry'. As explained for some weeks now, this is why hedgers and speculators alike are sending the put / call ratio on DUST (see here) into the tank in relentless fashion. And while you can't blame people for feeling this way after what happened over the past four years (an 85% crash), still, this does not help investors get on board this bull market now.
Here is what I responded to this subscriber, which is sound advice in my opinion, as follows:
"It's all explained in the commentaries. Look at the DUST put / call ratio and decide for yourself if these people will continue to drive it lower. This is a bull market because of what is happening in terms of the hesitation speculators show. There will be a correction at some point, but this is now a runaway. Silver bullion is still cheap. You can buy the trusts. Why risk money with the idiots running the companies when you can buy the commodity with similar return prospects. You just have to wait longer."
Precious metal shares carry risks that bullion does not, which investors found out about in a big way since 2011, with management risk chief amongst them. And there's even elements of self-serving corruption, with many (most) managements raping the companies in one form or another. Why do investors go for them if this is the case? Answer: Laziness and greed. Holding bullion safely is work and it's expensive. And you don't get the excitement seen in the shares when a mania arrives, which in theory is coming for precious metal shares.
Again, what to do right now then? Well, if the Fed actually tightens next week, a more profound correction may arrive at that time. However if everybody is hedging such an outcome and is still under-invested, one must wonder what the result will be. So again, if you just have to buy right now, obviously look for under-performing candidates that show potential (two were mentioned last week), and / or the bullion trusts like those offered by Sprott Asset Management. That's the best guidance I can give you if one is under-invested watching a budding mania unfold.
Did you see BlackRock suspended issuance of its gold ETF Friday because they can't get the gold without moving the price higher - likely a lot higher? That said, the fact it was Zerohedge pointing this out, which means the result of this news in the market will depend on how the speculators react, this news could in fact spark the correction. Fading Zerohedge is almost always a good idea because of this phenomenon.
That said, never have I seen a move in the two most important markets in the world (Dow and gold) the likes of the Dow / XAU Ratio (see below) over the past month-plus, where it's gone from a high of 420 in late January to its inverse of 240 on Friday. I mean that's unreal. But hey, if you can't get gold (see Blackrock announcement) crazy things happen. As I have always said, the US pricing of gold and silver is faulty and fraudulent, and this will prove out in the days to come, as it will need to be reset multiples higher. That's what the move lower in the Dow / XAU Ratio is telling you, because traders smell blood, and they are panicking into gold, or the shares if they can't get the commodity. (See Figure 2)
And you have not seen anything in this regard yet. Just wait until you actually (literally) can't get gold (and silver) bullion in the States in coming days. This day is now coming fast and furious. Again you can tell this just by looking at the crash last month in the Dow / XAU Ratio pictured above, where we witnessed a monthly close below the monthly 'swing line', never mind daily and weekly measures. I mean this thing is moving right out of the blue, and it's speed will take most by surprise, leaving many under-invested precious metal traders both flatfooted and increasingly broke the longer they continue to hedge existing exposures with inverse ETF's like DUST. (See last week's commentary.)
DUST saw five-times normal volume on Friday, which might have signaled capitulation, so don't be surprised in the now long awaited correction in the precious metals sector has finally arrived. Open interest in COMEX gold was also up some 25K contracts Friday as well, so we have more evidence suggesting correction, especially set against existing COT conditions being bearish for both gold and silver. That said, with both Russia and China doing their damdest to reduce the influence of US pricing mechanisms on global pricing such considerations will not always be so germane - however even with physical supplies getting tight enough for BlackRock to blink, unfortunately they still are - and will remain that way until proven otherwise. (See Figure 3)
As you can see above, once gold breaches $1300 (important round number and Fibonacci resonance based resistance) to the upside things will heat up in this regard. It should be noted the above monthly plot is available in the Chart Room to subscribers, which has proven invaluable to those using its wisdom. The importance of the 'trend definer' (155-EMA) is highlighted here, with the turn higher in gold off this most sacred measure. This is why I pointed out the Dow / Gold Ratio is on it's way to the 155-EMA in Figure 2 and it may not waste any time getting there. Gold closed above the monthly 'swing line' last month, so it's 'all systems go' based on all of these very important technical measures - take heed.
Further strengthening the case for a correction right now, and as alluded to above, we also have the Dow / XAU Ratio about as oversold as you are ever going to see it on a daily basis. The thing that could be the deciding factor in this regard is, in addition to the volume spike in DUST mentioned above (look for a reversal in the put / call ratio and open interest here) possibly taking precious metal shares back down, because of the still huge short position in the S&P 500 ETF (SPY), the machines should continue to take stocks higher - despite being record overbought - believe it or not. The machines are emotionless and thoughtless, so this would not be strange in the least to them.
So although it indeed appears a correction in the precious metals sector is finally in the works, at the same time it's important to realize this is the pullback you buy because based on the key technical evidence discussed above, the bull market is back. And while the bureaucracy's price managers will undoubtedly attempt to change this picture in coming days, attempting to pummel precious metals back down using their bullshit reports and rigged markets, again, it's important to realize that these corrections should start to become shorter and shallower, meaning if one is looking to get on board, one must monitor target markets closely.