Rising inflationary expectations keep money exiting the faltering stock markets away from their designer-made "safe havens" - government bonds. The result will be a powerful breakout of the precious metals and their mining shares.
The time for gold stocks to regain their old leverage over gold and ratchet up into their next higher orbit is very near, even though at the moment it may not look that way. Here are the reasons why:
Dollar's Head Bitten Off
The dollar is flailing and flopping like a salmon after being slapped out of the water by a Grizzly paw and having its head bitten off. It is now going through its final convulsions before eternal peace sets in.
Chart-wise, the dollar's final decapitation was signaled when its 50-day moving average sliced right through the neckline of a head and shoulders formation that had formed back in December 2007.
That, however, was only a sign of things to come. It was the time when, in the midst of dollar-turmoil and under mounting pressure for Bernie Bernanke to push his rate-cutting knife deeper into the dollar's spinal chord, the ECB's Trichet announced the possibility of a euro rate hike, of all things.
This graph shows what happened since then:
Back then, in December, the euro rate-hike was a "maybe", a mere theoretical possibility. Nobody really took Trichet seriously, of course. Everybody and their brother was in a "Fed state of mind", and the Fed has always inflated at any sign of trouble. Just this past week, however, Trichet made it crystal clear he wasn't kidding and said he was likely to hike the euro's rate, come as early as July.
That means, next month.
That move utterly short-circuited the combined efforts by Bernie and Hankieboy Paulson to try and soothsay some life back into the flopping dollar. Bernie uttered - for the first time in his own career and probably for the first time since Greenspan took office as well - the Fed's "concern" over the failing dollar.
Those words, with a little help from their friends at New York's trading desks, kicked the dollar up a few stair steps and hit gold hard, while silver popped right back up after its initial decline and the HUI actually posted a gain for the day.
Hankieboy, meanwhile, was on a begging spree, hat in hand, beseeching the sheiks of Abu Dhabi to please, please, bestow some of their sovereign wealth fund-riches upon the poor, decrepit United States treasury - but tricky Trichet nipped that one in the bud, real quick-like.
The Fed is caught between a rock and a hard place. Cut, you lose, hike, you lose - and staying pat doesn't look like a good option, either. Then came some dismal employment numbers on the following Friday and we all ended up looking on as the proverbial fan's centrifugal force continued to evenly distribute whatever it was that has been hitting that fan for quite some years, now. In other words, the squeeze is on.
Squeeze? What Squeeze?
Even Tuesday's (June 10th) coordinated announcement that Bernie is going to take a hike right alongside Tricky Jean -Claude will not do the dollar much good. It did on Tuesday, and it dropped gold's illusory COMEX price by some twenty-six dollars, but that won't last, as we all could see the following day. All it takes is for a few more financial institution-shoes to drop, and the dollar will be right back at its favorite occupation, of late - busily digging away at the rocky bottom it has already hit in September last year when it broke through the 80 point level on the USD Index.
The squeeze is very visible right now in a number of T-note/bond price and yield charts, as well as in gold and gold stocks. Let's take a look:
Gold got squeezed into a bullish triangle formation by its current meanderings between the declining blue line of the 50-day moving average and the rising red line of the 200-day MA.
Its upward trend is marked by the straight solid red line, which very much parallels the rising 200-day MA. Since gold touched its 28-year support in early May it has continued to bounce off that rising red line.
Tuesday's dollar-boosting Fed-talk managed to push gold decisively below that rising red line - and toward that same line of support from whence it bounced in May, forming a nice double bottom. Even if they managed to make gold breach that line, the damage will be merely psychological, not fundamental. Gold will not violate its secular bull market trend until it breaks below $600. Fat chance for that to happen!
The lower they push gold, the more powerfully it will rally, especially with the current shortage in silver eagles building up, in which the US Mint can't get its hands on enough silver rounds to meet investor demand. These and other factors, especially price-inflation, will soon result in a bull-run breakout from this pattern, very likely from a double bottom at $850/oz.
Silver finds itself in a similar situation, although it doesn't sport as pretty of a triangle pattern as gold does. What it lacks in that department it has made up with two tremendous up-days this past week, one of them even while gold was having a stumble that Wednesday.
Like it did with gold, Tuesday's hit has brought silver back down below its lower trend line, but that brings it only closer to its support at $16/oz. The silver eagle shortage will soon reveal the illusory quality of the COMEX price as a huge premium is about to build up for silver eagles above and beyond its paper-trading, cash settlement, COMEX price.
Rates & Bonds
All of the longer term treasuries and their associated rates are exhibiting similar squeeze patterns. Although some of their charts may look very similar to that of gold at first blush, the appearance is deceptive. The reason: The fundamentals for each asset class (precious metals vs. government debt) are diametrically opposed to each other.
A look at the history of 30-year bond rate over the past thirty years reveals why.
It took 30-year long bond rates in the 14 percent range to lure gold investors out of their gold and back into the fiat-dollar in 1980. Since then, gold has recovered all of its 1980 high and then some, while the long bond rate was still busy bottoming out. This secular trend in interest rates has only now begun to reverse itself.
The resulting monetary inflation (i.e., credit creation) that has mushroomed for decades is finally showing up in the prices of the things we need for everyday living instead of being confined to so-called asset bubbles. Inflationary expectations are on the rise and will not be managed back down by mere talk from Bernie and Paulson. These expectations drive long bond prices down and their yields up. The direction of bond prices from here on out is clear: Down, down, down and away while their yields/rates go the opposite way.
The shorter-term charts of the 30-year, 10-year, 5-year, and 2-year treasuries all show the same pattern. Prices are getting squeezed between their rising 200-day moving averages and their falling 50-day moving averages, which has already resulted in the long bond breaking down below its supporting 200-day MA for quite some time, now. The 10-year, 5-year, and 2-year notes have just followed suit this week.
Rising interest rates hurt the stock markets, but during price-inflationary times of falling treasury prices/rising rates, that money is not flowing into treasuries as intended. That rarely acknowledged fact breaks the usual see-saw relationship between stocks and bonds, and that means it breaks the dynamic by which the designers of this devilish system have kept the money flows within the paper markets they control at will.
During times of rising rates, that money flows into real things. Commodities, durable consumer goods, and real money, i.e., precious metals. Paper investments are out during such times, at least until a precipitously rising interest rate structure sucks money back into treasuries (which require dollars to purchase) and out of gold and silver, which finally lends support to the dollar.
In the past (i.e., 1980s), that worked perfectly because there was no alternative to the dollar - but now there is. Foreign government bonds denominated in euros will take the shine off of any attempts to steer investment flows back into the dollar and divert them to more desirable euros. The euro, however, is structurally gold-friendly, meaning its perceived value is not diminished by rising gold prices.
That's why 2008 is different from 1978. Today, rising rates will not draw as much investment money out of precious metals as they did back then. And that means the gold and silver bulls are free to roam wherever they please - and roam they will!
The only place, other than precious metals and commodities, where money exiting the stock markets can profitably go is into the shares of precious metal mining companies, and that's what has already started to happen.
Gold Stocks - the Rumbling Volcano
This past Monday and Tuesday appeared to have destroyed that nascent trend of rising precious metals stocks, but only in the very short term. Engineered fake-outs are very common these days. Fundamentally, they change nothing.
The two gold stock indexes have narrowed their once widening megaphone formations into a diamond shape of sorts.
That, together with recent anecdotal incidents of gold stock index rises, even on days when gold traded downward, point to renewed strength in the PM shares sector.
What's even more interesting is that the XAu appears to be outdoing the HUI, this time around. In bull-years past, the HUI outdid the COMEX gold price several times over during its rallies, but this time things appear to have changed.
Unlike the HUI, the XAU has not even broken below its triangle pattern, has been able to halt its descent right at its 200-day MA, and even managed to stay in positive territory today while the HUI dropped a bit.
Could be that this stems from a perception that gold and silver mines will soon outperform pure gold mines because the long-expected silver price explosion is just around the corner. Who knows?
As already observed, all of this is bolstered by rising longer term interest rates which keep investment outflows coming from ordinary stocks from sloshing over into the government bond markets.
In the end, the charts of gold, silver, treasuries, and PM stock indexes all show the same squeeze-patterns. They are all caught between their falling 50-day and rising 200-day moving averages, with the metals and their shares rearing to break out to the upside while the treasuries have already broken down to the downside.
The next gold and silver stock bull-run is not far off.