The following is an excerpt from commentary that originally appeared at Treasure Chests for the benefit of subscribers on Tuesday, August 12th, 2008.

Subterfuge, illusion, and misdirection - this is what the bureaucracy perpetuates on the public every day. Please look over here at the giveaways and presents we have for you while we continue to defraud your children out of a future - all for the greater good you know. Not surprisingly then, the net result of all this is an increasingly debased society, which accounts for our willingness to allow the same for the currency. Quite literally, one couldn't make this stuff up if you tried, such supposedly wealthy and educated people willing to give up their liberties so easily, but at the same time this has all happened before (think Rome - Bread And Circuses), just not on this scale. And nobody wants to touch the subject matter because it's just that ugly, a dark reflection on what we have become. A society of gamblers and drug addicts who need a variety of fix every day just to get by.

By extension then, this tendency is seen within investing habits as well, where once conservative markets have literally turned into casinos, with all caution thrown to the wind. And it's important for you to recognize this, that present trading mechanisms are not 'markets' anymore, but instead 'betting parlors', which accounts for the unbridled growth of derivatives and toxic paper contracts designed to swindle your money in being heavily in favor of the house. Certainly the most flagrant example of this is found in the rise and fall of various toxic securitized real estate debt schemes perpetuated by 'the establishment' that helped blow that bubble up far greater than ever should have been allowed. Having worked through the initial effects of subprime in the markets for the most part at present, which has finally set our corrupt financial community on the road to ruin where it belongs, process continues to unfold in this regard.

Oh yes, and corrupt they are, our present day financial community, and more. They are bold and reckless as well. Exactly how bold and reckless are they, and why should this matter to you? If I may, I would like to borrow from one of Jim Sinclair's recent dispatches that sums the situation up nicely in my opinion, as follows:

"The banks think that they have established the principle that if they over borrow enough, if they are reckless enough, if they expand enough, they become "too big to fail" and their losses will be borne by the taxpayers and all holders of the currency, while they keep their personal profits and bonuses."

So you see, the reason one should care about this is in adding insult to injury, an equally corrupt bureaucracy expects the public to pay for the financial community's excesses on the premise to do otherwise would level the system. Talk about holding a gun to your head, no? And of course this is in fact the situation, while at the same time banks and the bureaucracy also conspire to suppress precious metals to remove alternatives for those who contemplate exiting the system. In a nutshell then, the markets and financial system are a function of the government sponsored Ponzi Scheme (the largest ever -- known as the Fed) being perpetuated by the banks, now intensifying as an implosion approaches.

As suggested, and as with all such schemes however, the end will come one day, but not before all attempts to prolong it (notice the new money creation powers the Fed now possesses) are exhausted. And while central monetary authorities (the Fed) have been doing their best to hold back and hide (via monetization that doesn't make into the M's) their inflation of late, now that commodity prices have turned lower in a big way, as suggested a few weeks back, expect the banking cartel to do some zigging (printing money) once they have everybody else looking at the zag (falling commodities), with money supply growth rates taking off again. (i.e. the art of misdirection.)

Some think this cannot happen with asset bubbles declining and the demand for credit reacting negatively. (i.e. they think deflation is here now.) If this were true however, then why did M2 growth rates explode higher between the years 2000 to 2002, the last time credit growth fell sharply? Answer: In a relative sense they monetized everything in sight as measured by M3 (notice the pattern similarity with M2), which eventually did the trick. So to me, this means we should expect the same this time as well starting anytime now in knowing being the price managing fools they are, monetary authorities will now need attempt slowing the decline in commodities not to scare (deflation scare) people.

The question then arises, what can they monetize today (that's large enough) in creating the desired money supply growth rates? Answer: How about the entire mortgage market, via more sophisticated and far reaching methods of monetizing the new debt, along with the blank check Treasury now has to bailout the mushrooming defaults. This definitely sounds like a recipe for inflation and rising money supply growth rates, no? Of course all people can see right now are the collapsing bubbles, with talk of not just commodities joining this party, but the entire speculation game coming into question.

Of course declining speculation is exactly what precious metals markets need in order to provide a set-up for the next meaningful advance in the sector. And based on the way people are panicking right now, it would be fair to say this is the direction we are finally traveling. Those of you who have been reading these pages over the past few years know that my opinion has been the gambling attitude and practices fostered by growing paper markets (think ETF's, futures, and options) in precious metals has been a key factor in holding prices back. Over the next six-months or so this sentiment and gambling practices in the various precious metals markets should fade considerably now however, as speculators see their fortunes crushed. Here, those on margin and / or using options timed to take advantage of seasonal strength (until December) will likely suffer staggering losses, increasingly driving this element from the sector to set-up the conservative / wall of worry sentiment in the market capable of sponsoring a rally once stars become aligned again.

So you see, you can't just blame the bureaucracy and it's price mangers for this takedown in precious metals, because without the speculation / complacency in the market, this would never have occurred in this fashion, 'normal' as the present correction might be based on historical standards. What do I mean by this statement? Let's look at present circumstances. First, it should be noted gold and silver have provided positive returns for seven consecutive years in a row, which is rare for any market. Moreover, this in itself creates certain technical (as can be seen on monthly plots) and sentiment related conditions that are difficult to overcome absent a meaningful correction. Hence, here we are with silver down $2 over the past two days for example, now trading below its cost of production.

And the lunacy doesn't stop there, with gold now trading below its cap-ex adjusted production cost as well, which as with silver is obviously a condition that cannot be maintained for long. That being said however, don't be surprised if this weakness lasts long enough to send a good number of the marginal players (with marginal properties) and venture companies out of business in coming months, again, aiding in providing the set-up for the next meaningful advance. Here again, fortunes could be lost by those who have not taken care in portfolio planning, which includes more than simply diversifying one's holdings. Over investment in the sector, as well as security quality considerations come into play under present (non-liquid) circumstances, where for example companies in need of capital / income (think explores) could find themselves out of business or acquired for a song, potentially causing significant portfolio losses.

How can this be with the metals now trading below production cost, money supply likely to take-off, and World War III potentially in the making? Again, one must realize that YOU are at war with not just the banking cartel, bureaucracy, and potentially Russia now, but speculators as well. And that like now, they will conspire either directly or indirectly for their own benefit, or what they perceive to be in their misdirected best interests. For example, without even getting into a ratio related analysis, at present, calls on December Comex Gold Futures at $900 currently number in excess of 12000 contracts, which creates a meaningful ceiling in the paper gold market at this price, not to mention the far greater numbers at higher strikes. And while there appears to be put related support at current prices, this will not help cash strapped juniors, or the profitability of producers for that matter, if prices do not make meaningful progress by Christmas.

Thus, it's quite possible that like the year 2000 (also an election year) characterized by mounting liquidity related concerns, it looks like 2008 could turn out similar pattern wise, with lows in precious metals shares not established until late November / December (if we are lucky), and the metals there afterwards. This is not a prediction in this regard however, because on the other side of the world / ledger is Russia, who apparently will not be provoked by the West any further, as witnessed in their increasingly hostile attitude / actions. And as alluded to above, this could lead to an escalation currently not being discounted in precious metals markets. In fact, because paper related pricing is primarily controlled in the US, it could be hypothecated that this spike down is punishment for Russia's aggressions, however it's foreigners providing the money for the dollar ($) rally in what appears to be a safe haven spike (but is more than likely an intervention), so it's difficult to speak in this manner. Of course not many governments wish to see precious metals higher at anytime (especially sympathetic Westerners), so intervention should not be surprising.

All this being said, for you, all that should matter is your portfolio is properly diversified / structured / domiciled (get share certificates / book entries when possible) such that one will be able to benefit from a newly invigorated market once those factors holding precious metals back are digested / minimized. We have of course covered this subject matter in depth of late, and invite you to go back and review the material published over the past month in this regard. In doing so you will be reminded about our stern warnings with respect to the negative technicals in the precious metals sector that continue to unfold to this day. And believe it or not, in spite of what has already been a bone-shattering event for many (the unprepared) to date, indications with respect to suspicions voiced above concerning prospects for the sector running into the November / December time frame are being confirmed in the technicals. Here, and most telling, is the fact venture companies (juniors) are outperforming now during the parabolic move lower in precious metals / higher in the $, suggestive that at a minimum, a test of current proximities will be necessary later on prior to conditions becoming favorable in terms of a sustainable rally. Again, in this regard it should be remembered that the measured move (MM) with respect to the breakdown of the descending and contracting triangle in the S&P/TSX Venture Composite Index (CDNX) is all the way down to approximately 1300, still some 30-percent away from the large round number support found at 2,000 yesterday. (See Figure 1)

Figure 1

This is an updated snapshot of the CDNX / S&P/TSX Global Gold Index (STPGD) Ratio that shows how juniors have been outperforming due to strength in the stock market, which is bound to fail once bearish speculators have been squeezed out again. In all, this might result in a 10 to 15-percent bounce in the larger sector (and possibly the CDNX to 2300) before more weakness can be expected. (See Figure 2)

Figure 2

And then there is this snapshot of the monthly gold price denominated in Canadian Dollars (C$) showing the MACD broke indicated sine support just yesterday. This means that juniors in Canadian markets will suffer from not only lower metals prices, but also worsening liquidity conditions that cannot be expected to disappear overnight. (See Figure 3)

Figure 3

And although a near-term rally to alleviate oversold conditions on daily plots is bound to transpire at some point soon, what can be surmised from the technical snapshot(s) provided above is that assuming the stock market breaks down at some point this fall (or sooner), the drain on liquidity will have a continued / direct negative impact on precious metals venture companies (even if the M's turn up), which will in turn work towards suppressing the rest of the sector with the help of bullish / greedy speculators that insist on betting in paper as opposed to buying the physical commodity.

Think I'm wrong about this - just look at the collapse in the Philadelphia Gold And Silver (XAU) put / call ratio over the past few days coincident with acceleration in the plunge of prices. Remember now, this is with Russia doing its thing at the same time, which probably / potentially accounts for some of the call buying. The bottom line however is put / call ratios have plunged because crazed speculators continue to bottom fish this market instead of capitulating to the risk that they will not get paid on these contracts (and buying physical), which is likely the case unless something more dramatic / sustained occurs overseas. (See Figure 4)

Figure 4

Source: Schaeffer Research

Again, if the stock market does not remain buoyant, liquidity will continue to dry up until the Fed gets the M's reaccelerating, which will have a delayed effect. And this will be a problem moving forward from this point considering bearish speculators in the options market are getting squeezed out as prices move higher. Here, the only series that was high and capable to supporting further gains was the large NASDAQ contract. But as mentioned, it has collapsed with the short squeeze, leaving the only factor supporting higher prices now being short positions, which could play into the formula after expiry on Friday. (See Figure 5)

Figure 5

Source: Schaeffer Research

Barring this however, the way it looks right now is the broad measures of stocks could run into trouble very soon once again, which would likely cause a muted rally in liquid precious metals shares (and the metals), but place renewed pressure on venture companies given their continuous need to replace burned off capital in running their exploration / development activities. And as with the bottoming of the CDNX / STPGD Ratio back in 2002, this cycle will repeat itself until the broad measures of equities find a more lasting bottom, indicating credit conditions are loosening up once again, or the larger producers, and possibly even investment pools like sovereign wealth funds, see metals prices rising sufficiently to feel comfortable making increasingly aggressive acquisition bids, mergers, and / or financings.

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Good investing all.