The following is an excerpt from commentary that originally appeared at Treasure Chests for the benefit of subscribers on Tuesday, April 7th, 2009.

That's where we are in terms of whether equities, and the inflation mindset, continue to fill with air past this point - it's time for a pause. This is basically what Carl Swenlin is pointing out in making the observation intermediate-term technicals are now overbought, and that the stock market should pullback somewhat from here before building the necessary steam to produce a more lasting breakout. And this is what I expect also, as long as increasingly negative sentiment in the betting parlors allows prices to continue climbing the wall of worry. Because as alluded to in discussing our fraudulent and dysfunctional markets last week, you should understand that all of our markets work on the same premise, where the gamblers and speculative sentiment largely control price movements, not fundamentals, at least not until it's too late.

Too late - what is meant by this characterization of what typically happens in markets these days to keep the bankers happy? Answer: Markets have morphed the way they have, with the most profound aspect of this conversation being the unadulterated explosion of derivatives, to satisfy the bankers / brokers, and their need for exponential growth in transactions and revenues. Why do they have this need? Answer: Because the system is fiat based, with the increasing volatility / fragility that comes with it, creating the necessity for ever increasing volumes because essentially, the economy becomes a huge Ponzi scheme in the end. Herein, the capital that is destroyed in the fraudulent and dysfunctional markets must be replaced at an ever-increasing rate, especially during periods where deleveraging and debt repayment come into play.

This is why legislators continue catering to America's financial oligarchy with measures such as the FASB easing, because we are point in the lifecycle of our fiat currency system where episodes of deleveraging and debt repayment run the risk of imploding the colossus. The debt simply becomes too much of a burden. And measures to shift the debt burden from the private sector to government will not work in the end either, because eventually sovereign debt markets will implode as well. Of course our fraudulent and dysfunctional politicians must play along with the bankers to delay the inevitable for as long as possible because apparently it's the political will, not that they mind maintaining their lucrative positions you can be sure. Moreover, this is why a blind-eye is turned no matter what wrongdoing goes on, and why we cannot be too far from the terminal phase of any such system, characterized by hyperinflation, a collapse of socialism that morphs into facism, and then revolution.

And the mob will revolt when the mobsters fail to maintain the 'American Dream' one day. As explained at length over our past few outings, the fraud will eventually be exposed / accepted for what it is when our faulty market mechanisms fail to maintain the insanity, meaning general price levels take a real plunge, along with standards of living. As we speak, most markets are still operating as efficiently as can be expected given credit markets remain on the high side of dysfunctional, with equities enjoying a robust rebound at present, aided by all the giveaways. Again however, in the end it should be remembered that the gamblers will devour themselves in our dysfunctional markets, and take the entire system down in the process, which is why we continue to school an increasing transfer of paper assets to physical precious metals as opportunity presents itself. Now is one of those times with the price weakness.

Further to this, and because of all the shenanigans discussed above, that being the delaying and denial associated with our deleveraging, it's important to realize for this reason no mania in precious metals has yet occurred, and that when gold breaks above the large round number at $1,000, all hell is going break loose along with it. That's the one thing you need to tell yourself anytime you have doubts about where gold and silver prices are headed. However this won't come in earnest until all the gambling is done, denial turns to rage, and the specter of Depression is staring people right in the face. Then, the desire to speculate will finally be extinguished to a measurable degree within the present 'supercycle', and saving / preserving wealth will come into vogue, along with the desire to anchor wealth in the eternal safety of precious metals. That's when they will really shine, both in relative and absolute terms.

In the meantime however, the speculators have a diminishing desire to accumulate precious metals at the moment, not with the paper markets being so strong. And then there are the deflation worries that will in fact prove true one day, which is part of the reason precious metals are being hit so hard relative to other asset classes at the moment. And given, because precious metals markets are so small they do tend to be more volatile, at the same time it's my opinion at least a dash of price management selling is also to blame, coordinated with the announcement of IMF Gold Sales last week. Of course while it's true this could cause some selling in coming days, it should be pointed out that even if the IMF (US) actually carries through with such a threat (and if they actually have the gold), the gold would likely never even hit the market, with China a possible suitor for the entire lot based on recently expressed currency concerns.

And China is not the only central bank that has made rumblings in this regard. All we need is for a few more to come on board on the buy side and the Fear Index will take off to the upside (it rises with central banks are buying), and the metal of kings would soon be into four-figure territory thereafter. So please do not misunderstand what is happening in the precious metals markets here. This is a welcomed buying opportunity that will simply space the larger degree moves higher in the re-inflation trade, where sooner rather than later gold should quickly find its footing. At least this is the message I am getting in the charts. And we have a lot of them to be reviewed today in attempting to confirm this belief, so let's get to it, with the first being that of a weekly snapshot of the Amex Gold Bugs Index (HUI). I will not review gold technically this week, deferring to Dave's capable analysis, with a move down into the $850 apparently baked in the cake in possibly end the present corrective sequence. (See Figure 1)

Figure 1

It should not be a surprise to anyone if targeted diamond support denoted above holds this week then, which would coincide with a little more weakness in gold. As you may be able to tell, I have become more optimistic about prospects for gold stocks moving forward because prospects for the broads have improved markedly given we are only a month into correcting an 18-month bear market sequence. And it was 2-years for the financials; so based on this observation a full-term seasonal inversion (counter-trend rally) in the equity complex lasting until the fall would not be surprising at all, which means gold stocks have further to rally as well. So, to answer the question 'what will prices do if the MACD springs and equal distance (think Gann) above zero', a possible break back into the growth channel is the response. Of course in order to accomplish this the HUI will need to rebuild technical energy, which in theory, is why it's correcting hard right now. (See Figure 2)

Figure 2

Inflation will be the word once again if this occurs, and as you can see on the monthly plot below, if prices break back into the growth channel, the projection is up to the proximity of 800, which is also coincident with the denoted Fibonacci resonance related signature. Although I will not show it here today, the HUI (all the precious metals indexes) just completed what can be best counted as a 5-wave sequence higher last week, taking in excess of 5-months to trace out. So while it may take a month or two (most likely closer to 2-months) before the correction is completed, the good news is we will have another 5-wave sequence to follow that could last through summer and fall (think seasonal inversion), possibly involving a break back into the HUI's long-term growth channel. Wouldn't it be nice if it all works out this way? (See Figure 3)

Figure 3

Of course technicals of all the indexes do not appear this promising, where because the Philadelphia Gold And Silver Index (XAU) has little leeway to correct, the move higher must be fast and furious. That is to say based on RSI diamond support on the weekly, shown above, there is not much more room for a correction before prices would fall back out of the structure. Such an occurrence would not be good for the bulls, so let's hope prices hang in there. And please, do not think such an outcome is not possible. All it would take is for the stock market to turn lower, igniting another deflation scare, and annotations denoting more bearish possibilities on the monthly plot below would come into play. So, let's hope the more bullish picture found in the HUI's monthly plot is the scenario that prevails, no?

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Good investing all.