The following is an excerpt from commentary that originally appeared at Treasure Chests for the benefit of subscribers on Wednesday, September 17th, 2008.
Between Lehman Brothers and the AIG bailout, Western central banks have already printed somewhere in the neighborhood of half a trillion dollars this week, and it's not over as Washington Mutual, amongst others, are said to be up next. While undoubtedly being a record for such largesse, because these measures are simply monetizing bad debt of insolvent companies, as pointed out previously, the effect on the consumer's liquidity condition is minimal. In fact, when you add up all the stock market losses, amongst other things, the average investor remains worse off, and deteriorating.
Couple this with the bureaucracy's (Fed and Treasury) attempt to appear 'neutral' in front of the presidential election, which means they wish to do as little as possible to directly affect the economy for fear of being accused of favoritism, and you get a 'recipe for disaster' for continued upheaval before you in the financial markets today. Oh yes, there's one more important factor. Investors are becoming increasingly bullish due to the obviously unfounded belief that the bureaucracy will not allow anything bad to happen before the election, as expressed by falling open interest put / call ratios on 90-percent down days, seen Monday.
You could not make this stuff up if you tried, even in Hollywood. If you did, the best title for the work I can think of is 'a calamity of errors'. As mentioned yesterday, once you head down the road to socialism, after a while the moral hazard this engenders allows the bureaucrats to take 'unlimited license' in monitizing every problem that comes along until the system is broken. Then, like Humpty Dumpty, we all fall down together whether you are a responsible saver or not because your wealth has either been confiscated or exported by the bureaucracy.
In terms of a prognosis moving forward, in spite of the bailouts, complacent attitudes on the part of the investing public in the face of present lunacies ensures that stock markets will continue to fall, with losses possibly exaggerated as misplaced hopes associated with all the bureaucratic ease going on these days rightly snaps in favor of fear upon seeing continued failures. This is why we remain cautious on more immediate prospects for precious metals despite increasingly bullish fundamentals; fundamentals that once unleashed during more sane days, will end this mid-term correction in gold and silver.
In the meantime however, and again, as discussed yesterday, because stocks and commodities are likely to remain under pressure due the 'calamity of errors' discussed above, precious metals shares will face further losses set against continued buoyancy in the dollar ($) due to unfounded 'safe haven' buying, which in turn is what keeps a lid on gold and silver. How long will this last? Two things need to happen in order for precious metals to take off again. First, we need to see equity markets stabilize, which will happen after the election in November for two reasons.
First, once the election is passed, investors will not be so complacent about future prospects in the economy and start betting that way in options / futures markets, which will bring the 'perpetual short squeeze' dynamic back into the market. And second, which is the other ingredient necessary to sponsor such a short squeeze, with any luck the M's will start reaccelerating higher, meaning liquidity will be getting through to the little guy again (not just these monetizations which do little to help a cash strapped public), which will lift all equity boats, allowing the $ to fall.
How do we know the M's should start to feel the benefit of all the largesse occurring? Answer: As thought previously, and now becoming a reality, with accelerating problems in the financials, the Fed is being forced to increasingly accept questionable securities in exchange for its quickly dwindling portfolio of Treasuries. So, at some point in the not too distant future it will be forced to begin printing more money to continue these efforts, which in turn will positively affect the M's. Or in other words they will no longer be able to hide their inflation through covert monetizations and swaps, which means that increasingly, the largesse will finally hit the books.
And again, expect this process to begin in earnest for the reasons mentioned above after the election in November, where until then, pressure will remain on precious metals markets. How do I know this for sure? Answer: Because the charts tell me so, encapsulating all fundamentals / factors into telling pictures. Let's take a tour of charts I was working on over the weekend, where because they have not changed in substance over the past few days, will suffice for this analysis.
The first chart to be viewed and discussed is a daily plot of the Amex Gold Bugs Index (HUI), where upon close examination of indicator technicals, despite most people's perception that precious metals stocks are 'extremely oversold', one can see that in fact this is not the case. What's more, if we are correct about the prognosis for RSI on the daily plot pictured below, the present test should resolve downward in a diamond break to join all the others in the sector, sponsoring a move into the 225 area, which would be the customary Golden Retrace so often seen in precious metals markets. (See Figure 1)
Figure 1
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Good investing all.
