The following is an excerpt from commentary that originally appeared at Treasure Chests for the benefit of subscribers on Friday, May 16th, 2008.

The next shoe to drop for the financials, and the larger credit crisis, will be the market's acceptance that mortgage related write-downs are nowhere near complete or close to where they are going, where presently in extreme bubble locales like California, much of the market has been halved, at a minimum. Of course this condition is not isolated to just California, and the real estate market. Soon, bond ensures, Ambac the poster child in this regard, will need to come clean with respect to what condition our condition really is, and 'phase II' of the credit crisis will swing into gear. And based on the technical condition of Ambac shares, this shouldn't take long at all.

Be warned then, and make no mistake about it; this will trigger an acceleration of the economic slowdown that is now going global. What's more, make sure you understand the global nature of this downturn will temporarily affect the demand for commodities, especially those presently caught-up in manic bubble pricing episodes, better known as manias. Currently, the most prominent example of this is crude oil, where although prices could be heading higher short-term to long, the next significant pricing event should be a correction of present bubble pricing. The fact these fools are re-entering the commodities game right now is a clear signal trouble lies ahead, at least short-term.

Make no mistake about, and don't listen to those who don't do their homework, China has now built up a considerable overcapacity in it's economy, and once the Beijing Olympics are over, it's economy should begin to unravel at an accelerating pace. Once this becomes more widely understood, commodities will come under pressure. This is what its stock market is telegraphing in its halving over the past six-months. As mentioned previously, the Chinese stock market chart resembles that of the South Sea Trading Company, which retraced all of a manic bubble put on in just a few years both up and down. If the Shanghai Composite replays this pattern today, such an outcome will confirm we are in the midst of a Grand Super Cycle Top in stocks, at a minimum, and should be very careful - careful to save some of your wealth in physical gold and silver.

Can we be sure such conclusions are on the 'right track' when all you hear from mainstream media is everything is coming up roses again these days. Goldilocks is back, has tested the porridge, and concluded it's 'just right'. Why else would the stock market be going up, because it's discounting bad things in the future? Of course the full story is not out yet, where the credibility of those in charge is properly questioned. And while central planners continue to take whatever measures necessary to keep a contrived economy (financials) afloat, which prevents this from happening, if observations presented below are correct, their days are numbered.

To begin this exercise, let's take a look at the LIBOR Index, which as alluded to above, has likely been 'played with' by participants, and is about to undergo some changes in an attempt to maintain credibility. Here, all the shenanigans has worked to produce a head and shoulders pattern (H&S's) in the trade, where an unsuspecting man might conclude the neck-line is about to be penetrated to the downside in painting the picture 'all is well' within the world of global finance. (See Figure 1)

Figure 1

Of course if you are not the trusting kind, and have done some homework on the subject (like the above), one would know that the above chart is just another example of 'paint by numbers' prescribed by the banking community, meaning it's false in nature, and that if there were ever a chart that should suffer failed pattern recognition (i.e. a failed H&S's), this is it. So, don't be surprised if a neck-line break fails when tested, where positive divergences within the indicators would suggest this is the more probable outcome from a technical (natural) perspective.

Bolstering this view in no uncertain terms are observations found in this next chart, which does an excellent job of showing the positive correlation between the yield curve, CBOE Volatility Index (VIX), Japanese Yen, and gold. Here, the idea is when yield profiles begin to steepen, showing stress in the financial system is rising, invariably this leads to increasing volatility in equities (reflected in the VIX), which in turn causes speculators to reduce leverage (as reflected in an unwinding of the Yen Carry Trade), along with seeking wealth preservation in gold. As you can see in the chart below in this regard, yesterday gold and the Yen diverged from the other two because we may be close to a lasting turn point. (See Figure 2)

Figure 2

Further to this, one should take note of the fact that the VIX is approaching lows that were matched by considerably higher stock prices last October (the highs), which is a glaring divergence suggestive complacency reigns at present. And in relation to the LIBOR Index, while US yield spreads are 'less contrived', at the same time US debt markets are heavily monitized / managed, so don't be surprised if a lasting turn lower in equities is postponed, tested, and retested in June. On this basis then, with US stocks approaching our stated test targets laid out a few weeks back, we are now going officially bearish across the board again.

Again however, don't be surprised if in instead of the 155-day exponential moving average (EMA) acting as the pivot for yields this time around, the curve extends down to the 200-day moving average (MA) next month. Here, we would be amiss in forgetting hedge funds will be gaming the buy stocks and dollar ($) / sell commodities and gold trade until quarter end in June, where even if they can't keep the latter down, they will take advantage of the extra liquidity buoyant equities provide to jam the former higher anyway. This would cause that testing alluded to above to take place next month. The count in Figure 2 is reflective of this view.

This of course, has been our view all along.

In terms of precious metals, silver is under-performing gold at the moment suggestive credit conditions are anticipated to deteriorate soon, along with a weaker stock market / equity complex. So, in addition to expecting increasing volatility in stocks, the metals will not be the exception in all likelihood, especially if the $ rallies more than consensus. This is bound to happen given conditions in Europe are deteriorating rapidly, where the first whiff of dovish talk out of officials should put a good bid under the $ as a consequence.

Here, it's important to not think in egocentric terms, nor be naïve. Central planners know all this, and are planning to use dovish talk and rate cuts by EU officials in attempt to manage gold when the timing is right. I don't think it will work on an extended basis because this will mean an accelerating debasement of the Euro; but the initial shock of a change in policy will surely hit precious metals when it comes. As you know, our ultimate correction target for gold is between $750 and $800. Buy all you can afford in this range.

To be forewarned is to be prepared, so prepare for increasing volatility moving forward.

Good investing.