Why Precious Metal Rally On Track
The following is commentary that originally appeared at Treasure Chests for the benefit of subscribers on Monday, April 6, 2016.
So it was the biggest bounce in stocks since 1933, and best quarter for gold since the 70's. None of this should surprise you based on what's going on out there (think all forms of debasement), but for us the most important observation is gold has signaled it's ready to start its next leg higher. Silver should still have you wondering, which is of course what the establishment wants. When you see silver go through $20 though, it will run to $50 quickly. And if it makes it through $50, which means bullion buyers will have to chew through JPMorgan's (the government's) entire hoard (if it exists), it will be at $400 quickly as well, matching the bull move of the 70's coming out of its mid-cycle correction. We expect to see these trajectories in the 2021 area, a Fibonacci 21-years from the year 2000 turn.
Just to be clear then, what we got in the first quarter was a buy signal in gold, the shares, and key ratios; highly suggestive the bull market is back on. All we need is for silver to join the party in this regard, and we are off to the races. Further to this, and unfortunately for everybody, it appears this buy signal is not a result of political instability, or the threat of war, or any other result of the general state of debasement the 'powers that be' subject us to, but the result of anticipated currency debasement, the old standard. That's the only conclusion one can to given the pictures (charts) below. That's what we are going to do this week - go through these six charts because they confirm this thinking. The delayed positive reaction in the equity complex to Yellen's comments Tuesday was the tell, boosted by the insanity over at the ECB as well.
Yup - the ECB is talking 'QE for the people' with the economy grinding to a halt, and the Fed won't be too far behind is the message we got from gold in the first quarter - even if we are only in the first inning of the move. And the thing is, we are getting confirmation of this thinking in the charts, where for example, the S&P 500 (SPX) has turned bullish on all accounts, even the monthly plot with a higher high finish in March. (see below) What's more, and as can be seen on the monthly plot below, although RSI will most likely generate a negative divergence in the indicators set against new highs (now likely), the message is still bearish, a 'topping process' if you will - even if the SPX is able to surge to the Fibonacci resonance related target in the proximity of 2450. Such an outcome would shock a great many traders, finally curbing their desires to hedge every advance in stocks. (See Figure 1)
Because authorities have to do something dramatic with stagflation creeping into the economy and the election only months away now. It's not like the old days, where the Fed would remain neutral. Now, with guys like Trump and Sanders threatening to defrock the Fed, they have become very biased bureaucrats fearing for their jobs. This is very important to understand because many either don't, or chose not to believe it, which could be expensive if they are short stocks. Again, this is confirmed in the monthly SPX / CBOE Volatility Index (VIX) Ratio plot seen below, where as with the above, here again we had a higher monthly close, the indicators appear constructive, and the stochastics have turned higher. As unlikely as such an outcome may appear, and although the move can fail at any time, short sellers should be very cautious here at this ratio appears set to vex the sinusoidal again. (See Figure 2)
All we need is for tech stocks to catch a bid again and even though earnings are set to crash (9%) this quarter, at a minimum stocks could still grind higher. Remember, stocks are completely detached from the economy and reality now - a video game if you will. Again, at this point, with broad market open interest put / call ratios none supportive of big gains in stocks, the best anyone should expect is grinding action, however if traders were to become more bearish for whatever reason, especially in tech, the NASDAQ / Dow Ratio would bounce off of monthly 'swing line' support seen below, and a big move higher in the entire stock market would ensue. As it stands now however, with traders increasingly thinking the Fed has their collective back, a dramatic change in sentiment is not anticipated until either next year if a status quo candidate gets into the White House, or they fall if the opposite occurs obviously. (See Figure 3)
And it's looking increasingly likely the fix is seriously being set up in election land on both sides of the docket, so it will be very important to have the economy and stock market looking as good as possible this fall, which can only be accomplished one way - accelerating currency debasement that actually trickles down to the people. (i.e. because they are not that stupid anymore - it's amazing what being hungry will do to your perspective.) And this is of course why precious metals are doing so well, and why this will continue, now signaled by two consecutive monthly closes below the 'swing line' in the Dow / Philadelphia Gold & Silver Index (XAU) Ratio. (see below) What's more, it should be pointed out that despite numerous attempts on the part of price managers to trigger a sell-off in precious metals, with last Friday's strong (fraudulent) jobs report an excellent example, the shares remain strong. (See Figure 4)
Is this solely because traders see currency debasement rates accelerating and QE for the people? Answer: Nope. The shares remain strong because as traders see status quo tacticians fix the election, they think this means precious metals will come under attack if this trend gains traction. Because a good price fixer knows you can't have higher stocks without kicking the crap out of precious metals - right? Wrong. I can tell you from watching traders my whole life the aggressive ones have it wrong most of the time, and they have it wrong again here. And this will yield an alternative outcome to what the consensus expects. You can set your watch by these people because they are reliably naïve. Further to this, if the broads keep going up, even if only marginally, which is what the picture below suggests, this will light up precious metals even more as process unfolds. This is the message found in the Dow / CRB Ratio continuing to surge to historic highs. (See Figure 5)
Because all that matters in the end (in the price fixing game) is the counterintuitive betting practices of the options gamblers, who are as we speak becoming increasingly bearish on precious metal shares, evidenced in the open interest put / call ratio for GDX (see here) nudging above .80 last week - possibly on its way above unity as the mania unfolds. This, combined with the observation DUST remains pinned to the lows for the same reason, and guess what, we now have the same sentiment related circumstances that keep the broads going higher working for precious metals - you have the algos and machines that drive high frequency trading (HFT) working in our favor. Further to this, if the broads keep going up, this will light up precious metals even more as process unfolds, which is the message found in the Dow / CRB Ratio continuing to surge to historic highs. It's almost at the Fibonacci target now. When it gets there and reverses, this will put a bid under precious metals in discounting future inflation expectations. (See Figure 6)
And this is also the message in the Gold Bugs Index (HUI) / Gold Ratio pictured above, where here too we are through the monthly 'swing line' for two consecutive months, the swing line has turned (up), and its waves are counting in bullish fashion. It's been up four months in a row now, raising the probability it goes up again this month because four is not a Fibonacci number. That's going to surprise a lot of traders if this occurs, because they are all watching the COT's and dollar($) and thinking the opposite. What's more, and as alluded to above, this is causing them to buy puts on the GDX and DUST calls, which will cause the opposite outcome in the shares they expect (down) no matter what the physical metals and $ are doing. Because unlike people, the machines don't discriminate. They follow the logic of the algorithms, and the algorithms are programmed to sell a security when open interest put / call ratios are low, and buy when they are high. The thinking here is price managers know fundamentals for stocks suck, which will cause speculators to buy puts against the broads, which keeps the perpetual short squeeze running - and visa versa for precious metals.
Now though, because of what's happening in the real world, speculator logic loops are being disassembled regarding precious metals, causing them to become increasingly bearish evidenced in the rising put / call ratios on key US ETF's, like GDX, the largest and most important precious metal share vehicle in the market. Again, the COT report for gold last week saw a build in Commercial shorts, taking their position to a new record high. The bankers want to keep a lid on gold badly, so they are selling it down. The speculators are of course watching this, and in being semi-conscious wiseacres, they buy puts on GDX to cash in on anticipated weakness in the shares due to gold declining. Like last Friday, which saw gold down and the shares up however, what the consensus of speculators think and act on never pans out. The machines don't correlate the shares and bullion (they treat them as separate markets), where the two markets can diverge for some time depending on how stubborn and stupid the speculators want to be. History has proven the extremes are increasing in this regard.
So the thing to do is watch the key ETF open interest put / call ratios we follow (see here) closely for more departures from the norm. Hopefully more of the ratios begin vexing unity soon, led by GDX. If this occurs, the precious metals market will become explosive. A Commercial short squeeze (signal failure) on Comex is even possible under present circumstances. If Sanders for example, continues to kick Hillary's butt up until the convention and wins the popular vote, swinging many of the Superdelegates over to him, things could get very interesting in coming months. But it's important to understand, a bullish outcome for precious metals can develop no matter what is happening on the political front because with the economy continuing to deteriorate, central authorities will have no choice but to adopt increasingly desperate measures to keep the mob placated - or so they think - because it's already too late for the naybobs in Washington.
And it doesn't matter what the stock market does either - up, down, or sideways. If stocks remain elevated, which we know is the probable outcome based not just on the above profound charts, but the still huge short position as well, this would actually be better for precious metal shares due to liquidity conditions, especially for the juniors. The juniors and the broads were moving in tandem up until 2011 based on currency debasement trends, when the bullish speculators started buying too many calls and the machines took precious metal shares down. So there no reason if currency debasement rates reaccelerate and precious metal speculators grow bearish that the shares can't make a very big (catch up?) move back up.
Now wouldn't that be nice.