The following is an excerpt from commentary that originally appeared at Treasure Chests for the benefit of subscribers on Wednesday, June 18th, 2008.
With a collapsing credit cycle unfolding before our very eyes, central planners believe they must paint a picture that what's happening is 'normal' and 'ordinary', where in the end all will be well. And in spite of evidence this time around things are different, the media would like us to believe that the public thinks this is the case. What's more, the media, led by central planners, would like us to believe the investing public also thinks everything is 'just fine', with exploding unemployment, collapsing consumer confidence, and an imploding credit cycle nothing to worry about longer-term. All this while problems associated with a collapsing credit cycle are multiplying, with new problems hitting the fan more and more all the time.
And in the past central planners have made it appear they were correct in their optimism with respect to the resiliency of the economy. Of course you will never hear them talk about the fact it's taken a collapsing dollar ($) and quasi-hyperinflation conditions to tame the business cycle. Nor will you hear them talk about the fact that it's the same policies that keep delaying an inevitable downturn in the business cycle that causes prices to rise. This is all part and parcel of that lying thing bureaucrats do to preserve their jobs we were discussing the other day, where a gullible public will never come to understand what inflation is all about, and they know it. So, the lies will continue and remain effective until the republic is striped bare by an unscrupulous bureaucracy, finally ending in not just a temporary downturn now, but a lasting collapse due to the exhaustion of resources.
How could this happen today? Is not 'modern society' way past these considerations? In a nutshell, the answer to these questions is 'no', with the evidence for those who wish to understand the truth of the matter found in the bureaucracy's unending efforts to keep a lid on precious metals prices. You see, gold is the old money because it cannot be conjured up by the whim of a corrupt bureaucracy. As opposed to fiat currency, gold and silver must be mined out the ground at great expense and effort before put into circulation as money, having a restraining effect on man's aspirations, especially those who do not know good measure. This is the thing that is corrected in an affluent society such as ours after extended prosperous times, the lack of 'good measure', and over-exploitation of resources.
In the meantime however, and as alluded to above, the bureaucracy will continue in attempting to preserve itself at all costs, this while the end is neigh, as we know it. And while it's true some form of organizational bureaucracy will always be with us, even in dictatorship, never before has the republic been so dependent on central planning, with all the idiosyncrasies that go along with such thinking. So, when change comes this time around it will hurt, last long, and end lives. This is of course why the bureaucracy fights tooth and nail to preserve itself. But change is in the wind. And although it might be spun the wrong way by our own desperate authorities initially, a disintegrating Euro is evidence change is accelerating on the most profound levels.
Again however, in the meantime a collapsing Euro would likely aid the bureaucracy by helping to keep gold prices down temporarily, spun on the supposition a bolstered $ will remain the world's reserve currency. Of course if gold were to rise as well, such stories might quickly become thin, especially if commodity prices keep rising too. Be that as it may, make no mistake about it, our price fixing bureaucracy is on the job here too, ready to do their best to put the screws to Mother Nature. With crude oil in backwardation now however, meaning it's not speculators buying the front month (which means the demand is real), any silly talk / actions to send prices lower will prove to be that in the end - silly - because it won't happen on a lasting basis.
Don't tell this to our price fixing bureaucrats however. They've got their own agenda, where they need to tame commodities soon, or maintaining the fantasy everything is 'just fine' won't cut the mustard this time around. The storyline goes something like this. Bernanke and company get hawkish on prospects concerning the economy via jawboning, meaning they talk tough, but don't actually do anything about in official policy. To do the opposite (actually raise administered rates) would put too much pressure on a collapsing bank cartel, and they know it. Instead, the Fed has their agents take the Fed Funds Rate up in the market (currently the Fed Funds Rate is discounting 50-basis points of tightening over the next 6-months), which has the effect of slowing the economy, but leaves profit margins fat for banks. This is the cornerstone of the illusion the Fed wants to slow the economy.
Of course the Fed does not want to slow the economy anymore than it already has (since we have stagflation), however it does wish to see commodity prices lower in attempting to hide its own inflation. This is why it has its agents attack commodities and precious metals whenever possible, to hide the inflation they themselves create such that the illusion they are actually responsible for price stability is maintained. Along these lines, and with the help of 'plugged-in' hedge funds (bank owned, etc.), the sanctioned / promoted 'official trade' during the present quarter is to be long stocks / the dollar ($) and short commodities / precious metals. What's more, one does not need be a genius to figure this out as everyday it's the same routine, where price managers attempt to panic investors out of their commodity / precious metals positions for the benefit of the broad measures of stocks.
And if you look at index related open interest put / call ratios right now, this is exactly the way market players are betting for the most part. Orthodox / complicit traders are betting against precious metals, as indicated by a rising put / call ratio in the Philadelphia Gold and Silver Index (XAU) And this is also the case for energy shares seen in Figures 2 and 3, those being the Amex Oil Index (XOI) and Spiders Energy Select ETF (XLE) respectively. But then there is the crude oil ETF United States Oil Fund (USO) seen in Figure 4 that is falling against a rising price, indicative the short squeeze is maturing. Of course with small speculators apparently not exhausted yet (see yellow bars), combined with backwardation in the crude oil market mentioned above, this could cause outcomes to be quite different in terms of how the gamblers are betting, not that they won't press their case next week in putting on quarter-end related window dressing.
You may remember this has been our view since March, that the buy stocks / $ and sell commodities / precious metals trade would be maintained by the hedge fund community until quarter-end. And it's not surprising this trade is not having much success, with stocks and the $ only marginally higher set against abject failure in the case of higher commodity prices. Not so with respect to precious metals of course, but there will be a price to pay for that later on as the ludicrous amounts of short selling that goes on in the precious metals market will need to be covered one day. And if Ted Butler is right, it just might be silver that leads this charge, and it could happen sooner than the price fixers think. Here, it's important to realize the paper related short position in silver is so much greater than physical supply it would take more than a year's worth of global production (because there's no stockpiles) to be satisfied. For this reason alone you want to be very long silver and its related equities no matter what price managers do in the short-term, because as was mentioned previously, one morning you will wake up and silver will be bid up $5 or $10 and not look back until it's into three-figures.
In the meantime however, and as alluded to above, this will not stop central planners from attempting to carry out their wishes, and smash precious metals prices into quarter's end. This is the picture they wish to paint, and traders are heeding the warnings, which should make things interesting as we move further into summer. Here, low US index open interest put / call ratios and falling short sales combined with collapsing margin debt thresholds could cause the same for the indexes - that being collapse. In fact there has not been a better set-up in some time for a big break in stocks based on the above (negative) configuration within the internals. The only question in my mind is whether quarter end window dressing efforts will be successful or not. It's difficult to say for sure, but since low put / call ratios are holding stocks down this month, it's possible stocks pop after expiry. Such an outcome cannot be dismissed as a possibility.
That being said however, and as pointed out yesterday, once the S&P 500 (SPX) breaks below long-term support at 1300 things should get interesting. And not just in terms of plunging stocks, but for rising precious metals as well. In terms of the stock market, August should be the bad month again this year because open interest in puts and calls on the indexes falls off dramatically, which in and of itself is enough to allow stocks to decline with nobody to squeeze. As mentioned above, add on top of this short sellers appear exhausted, along with margin debt now trending lower, and a recipe for disaster has finally been formulated to shake the cockles of the complacent. And it doesn't end there, as the recipe now includes an exploding commodities profile set against a collapsing economy that paints a crystal clear stagflation picture that has people very worried. As you may know, it was similar circumstances that triggered the 'point of recognition' in the 70's precious metals bull market. So, as alluded to above, even if price manages get their way until quarter's end, expect a violent reversal of these trades starting in July.
As mentioned numerous times lately, based on the charts it appears price managers should in fact get their way into quarter's end, meaning one more shot lower is likely in the cards for precious metals. The first chart up that supports this view is of weekly gold, where both indicators and stochastics are suggestive lower prices should be anticipated. Again however, the 50-weeks MA should provide support as in the past, so don't blink because the correction in precious metals could be over before you know it. (See Figure 1)
Figure 1
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And the 'correction incompleteness' in the charts does not end with the weekly. In fact, it not only extends to the monthly gold chart, but becomes more profound as well. As you can see below, even though the future ultimately looks bright in terms of a lack of negative divergences in the charts so far, more correcting from presently overbought levels appears appropriate in terms of what would be considered even 'minimal corrections'. So you see, even though the fundamental backdrop for gold could not be better, technical constraints still need to be satisfied. (See Figure 2)
Figure 2
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Of course in looking at the monthly, one would expect a far greater correction than is suggested in either the daily or weekly. So assuming improving fundamentals for gold take hold of the trade sooner than later, one should expect the monthly to remain in an excited condition for some time. Here, what one should expect to see along the way are channel breaks that are soon reversed, along with multiple instances / extended durations of negative divergences in the patterning of indicators. On this basis, the monthly gold chart is nowhere near overbought.
In terms of precious metals shares, they have arrived at important support and time line measures across multiple chart metrics, not least of which can be found on the weekly Amex Gold Bugs Index (HUI) plot. Here, and as can be seen below, a break lower at this point could prove interesting with all the indicator diamonds breaking to the downside as a result. So from this perspective it's quite important precious metals shares remain buoyant if the whole false break thingy, which is a usual for precious metals stocks, is not played out. (See Figure 3)
Figure 3
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