The following is commentary that originally appeared at Treasure Chests for the benefit of subscribers on Monday, July 4, 2016.
So what are we talking about here, because there are many wars being wagged in the world today. There's the war on terror, which the West manufactured post 911 as a make work program for it's primary industries, money printing, technology, and ordinance manufacture. And then there's the Syrian War, which is yet another Western construct to do the same. And there's also the war on drugs, which is another official American construct to make work at home, making war on it's own people at home, and the root cause of the militarization of the police, making America an official 'police state'. It's always been that way underneath of course, however the war on drugs and 911, as the acceleration point, just cemented the deal for America's ruling class - at war with anything that's defenseless, moves, and can generate a profit.
Listen to the mainstream media (MSM) and you won't hear a word about any of this however, because the ruling class likes to keep the village idiots dumb and pliable. And they have been hugely successful at this, where at the core of group think control, we now have Facebook and the like, where the hapless actually pay to be managed, surveilled, and exploited. Worldwide Facebook has some 1.65 billion active monthly users now, up 15% year over year, and 67% just since 2012. Many people literally live on Facebook now, fully consumed by the 'modern lifestyle' and 'conveniences' it provides, right down to the news, which is shaped by the thought police in neo-liberal fashion. Again, this is why you won't hear a word about the American ruling class and police state exploiting its people, however you will hear about all those nasty foreigners - others you are encouraged to hate in order to distract you from your real enemies - domestic corporate and politico exploiters.
All good things must come to an end however, even for the exploiters and their ilk, as evidenced in the recent Brexit vote, shocking the status quo who thought they had the rig all worked out with what they considered fully 'dumbed down' and 'conservative' plebs on The Island. Thing is, when people who were led to believe they were 'entitled' realize they've been disenfranchised, they have a tendency to rebel against their oppressors - with Brexit a de facto 'soft revolution' if you will. What's more, it's this same sentiment, formerly complacent idiots drinking any cool aid put before them turning into an 'angry mob' that fuels revolution, soft or hard. Today, with the only wars waged being the 'make work' variety on the defenseless, political and economic realignment will likely continue to be the definer of 'change' moving forward, especially amongst the 'big boys' - US, China, and Russia.
As discussed on these pages for some time, it's this sentiment, and the worldwide decentralization process it engenders, that will continue to define our morphing political economy moving forward, a manifestation increasing numbers are beginning to realize 'change' and 'discontent' has gripped the macro. And again, process will do nothing but accelerate in this regard, where just last week, even before he's in office (assuming he makes it), Donald Trump declares economic war on China, and not two-days later, they fire back. What's more, they will keep firing back until Western elites wake up from their dream, which will come on like a freight train once their paper empires begin falling apart on an accelerating basis a process well underway on a real basis. (i.e. as measured against gold and other real stuff.) Again, as mentioned previously this acceleration point would be marked by a breakout in silver, the status quo's 'whipping boy', the most important indictor of control loss for Da Boyz. $18.50 is the mark most technicians have been watching in this regard, which was of course bettered last week.
What's more, silver had an outside reversal higher in the month of June, flying in the face of true sentiment conditions (ETF open interest put / call ratios, Comex extremes, and a very determined status quo). So the question of the hour in this regard is why? Is it because the vaunted Comex default has arrived? Is it because the Chinese think Trump will be President for the same reason Brexit occurred (status quo rebellion), and they will have to deal with him (see above)? I don't believe the Chinese will anger Americans before they must because of trade, investments, etc.; however, if speculators think this probable because of some 'off the cuff' comments Trump makes is another thing. The question is do they have the trade set-up for follow through if this is not the 'real deal', because the Chinese would be declaring war on America by doing so - a currency war. These will be the wars of the future as long as the crazies in charge continue to respect the power of nuclear weapons - currency / economic wars.
One could argue this is already happening, which is of course the case. However it's a matter of degree, and speed, that will make the difference if it's just a skirmish, or a bloodbath. Again, it's difficult seeing the Chinese starting something really ugly until they can without meaningful reprisal (not until they are in the IMF's SDR's), or there's little to lose on the trade front (if the stock and bond markets crash), so it's difficult envisioning breakouts now, especially with the speculators on the wrong side of the trade again. (i.e. increasingly positioned bullish.) Therein, if something on the fundamental front doesn't develop very soon (continued Brexit fallout - is the money printing already factored in?), a false breakout could end up being the result. While gold cleared $1325 on Friday, which you will remember is the mark we need to see in the rear-view mirror on a two-day closing basis before anybody should get excited, we still have this week to contend with. So any way you cut the situation the precious metals market remains 'dangerous', one where it's still likely a good idea people approach in guarded fashion, meaning one would do well seeing gold clear $1325 this week as well before drawing any conclusions. (See Figure 1)
Technical note: In the end, it will all depend on the dollar($) ultimately, where a fundamental decline here could supercede any other factors for a period of time. Such an outcome would finally unleash commodity prices with all the money printing - America no longer able to export its monetary inflation. The outside up monthly close in silver last week points to accelerating currency debasement, consistent with the belief (on the part of traders) money printing is set to take off now, and / or the inflation that already exists is coming home via a $ crash. And the breakdowns / bailouts in Italy and Puerto Rico confirm this view. (i.e. these were huge bailouts, giving rise to the question, 'what's next?') The $ is not giving any such signals however. It needs to close below indicated support above to do so - meaning its currency wars - competitive devaluations that continue to drive prices, which are in turn a function of relative monetary debasement rates.
And then there's the tendency for silver to blow off at the end of a move in the sector, so it will be interesting to see what happens this week. Do the Chinese spark a 'Commercial Signal Failure' for American bankers on Comex? This would be both unwelcome, unexpected, and expensive at this tenuous point considering bullion banks currently hold record shorts in both Comex gold and silver. So one must wonder if this is the Fed attempting to drag more stupid money into the market before it lets the algos loose on them. As options expiry approaches on the 15th of this month, with bearishly predisposed put / call ratios stroon across the sector, false breakouts could be the game plan for US price managers. In the full measure of time, none of these games would matter, as precious metals will ultimately prevail, however the 'whipsaws' these animals create wears you down over time. (See Figure 2)
Technical note: Even though the head and shoulders pattern in the Gold / Silver Ratio (GSR) has broken the neckline, it has also declined in a rather large (6-month) five-wave decline, meaning it's in need of an a - b - c correction at some point relatively soon. So while it's true silver could continue to travel to $22 in the short-term, the large round number at $20 should remain in play whether as resistance or support for several months as the GSR works off its oversold condition. So trade accordingly. (i.e. cautiously.)
Again, from a technical perspective, what silver is most likely doing here is shaping the head and shoulders pattern in the GSR, pictured in the weekly plot above, with a test of this week's neckline breakdown the most probable outcome at some point. Only thing is, prices keep rising unexplainably from a 'conventional analysis perspective', because again, sentiment wise, precious metals should run into stiff headwinds soon, as ETF options expiry on July 15th approaches. Then you look at Comex open interest falling in silver as prices rise (cancel that - this didn't happen once it broke out), signaling a Commercial short squeeze (signal failure?), and you say to yourself, yes, there's risk, but at the same time one must be happy if they are holding strong core positions. And this of course is the prescription moving forward, because silver is so oversold long-term, and in breaking back into 'bubble territory' - anything can happen - Commercial Signal Failure - anything. (See Figure 3)
Knowing what we know about sentiment presently however, and the timing of the next ETF options expiry, even if prices continue higher in the short-term (to ~ $22?), the chances of a violent correction continue to build. If silver is officially breaking into 'bubble territory' as delineated above, then a move to approximately $22 could easily be followed by a correction back down through the large round number at $20 briefly to test the event. Of course $22 might not stop silver's rise if the Commercials are really in trouble. If $22 goes, then $24 comes into view - and then the large round number at $30. But it's $33 that's the important number. Once it goes silver will be back to $50 in no time - and then $100. Three years ago Bitcoin went from $20 to $1,000 in one year - Bitcoin - quasi-currency for computer geeks. (i.e. blockchain won't prevent the eventual debasement/corruption of this market as well.)
So, there's really no telling what silver could do under the right conditions - status quo 'whipping boy' or not - especially if the status quo is done. Herbert Moolman has penned an excellent piece in this regard that frames where we are in the big picture right now, seen here. People will be shocked when they see the degree of inflation that's coming - and how fast it can arrive. Is this what precious metal stocks are telling us right now with a relentless rise? Yes and no; because certainly, crazed speculators definitely play a big part in the market too. But for our purposes, which is attempting to protect your wealth from the various forms of confiscation (by owning gold and silver bullion), sprinkled with some strategic speculation in the fast movers (precious metal shares), we are not concerned about hyperinflation if it comes because we are fully hedged for this (right?) - along with the fact it wouldn't last long. Your living standard might be dramatically affected on a more permanent basis if not hedged, but the high prices will do the job relatively quickly. (i.e. kill the global economy.)
Back to the here and now, and in terms of the Gold Bugs Index (HUI) then, the inverse head and shoulders pattern (IH&S) appears to have broken out on Friday, measuring up to approximately 280, which as a matter of fact, matches the same structural measure in silver's pattern (IH&S) up to $22. So you have two important measures telling you to be careful, with another 10% surge in both to be expected in the short-term, but who knows what afterwards. And wouldn't be ironic then, if the HUI corrected 20% after that back down into the vicinity of 200 plus (220?). Of course it may not make it that far down given the pace of change these days, however one would think sentiment conditions could have a bearing on prices between now and the 15th. That being said, with everything going on these days, the money printing, political upheaval, and general discontent, based on what precious metals have been able to pull off over the past few days, clearly, sentiment considerations will need to given less weighting in timing decisions moving forward - because it's a panic to get in apparently - in typical bipolar fashion these days.
With Comex raising margin requirements on gold twice in a week, you must wonder when this will have an effect on the less well-capitalized gamblers as well. Of course all these guys are not gamblers, and if as per above Trump has rattled China's cage sufficiently, maybe they intend to drain Comex. It wouldn't matter who it is (even hedge funds) as long as they take delivery. That said, one must wonder if this why speculators are moving over to silver, because no margin hikes here yet? If that's the case, which I suspect, then true sentiment conditions should kick in sometime later this week. Any way you slice it - if HUI hits 280 this week, only the truly foolish would open new long positions - even though they would be fine in the full measure of time.
Looks like we may get that two-day close in gold over $1325 today. And if silver can close over $20, well, the monthly chart will turn bullish not only because of what is discussed above, but also you will remember from here (see Figure 3), that RSI will break back into the growth channel. It's not only done this but also tested the breakout and is now powering higher. So if both gold and silver can hang onto gains this week - this would be very bullish even if the next is not so good going into ETF options expiry. Word is it's the European banks and Chinese buying causing the surge in the metals, especially in the absence of US traders here on July 4th, however in the end it will ultimately be a crashing $ and loss of empire, and the various wars required to get there - no?
Good investing is possible in precious metals.