The following is an excerpt from commentary that originally appeared at Treasure Chests for the benefit of subscribers on Wednesday, Nov 4th, 2009.
Gold is in the headlines right now because of India's announcement to buy half the announced IMF sale, and possibly more. But this is not why gold advanced so strongly yesterday. It blew past previous highs because we are in a significant cycle down time for equities right now, and the perception is if stocks are not to follow the natural path in this regard, authorities will need to hyperinflate. Conveniently then, the dollar has reversed lower because of this, which is supporting equities and altering the crash signatures in the trade. So you see India's announcement is not the reason precious metals exploded higher yesterday in some degree of a parabolic move (this will be discussed further below), but the trigger for the move, with speculation and money printing, our bureaucracy's two favorite things these days, the real culprits. All to save their precious stock market - that's why Warren Buffett was out yesterday to jigger the Transports.
Unfortunately for him, this will not work, and the Dow / Gold Ratio will work lower anyway, which was forecast for you several weeks back now, at the turn. In this respect, it's my belief the Dow / Gold Ratio is presently on it's way to the next large round number at 5, characterized by an intermediate-term advance in gold, along with falling stocks. And again, this is why gold advanced so violently yesterday, because price managers are attempting to prevent stocks from falling because of the deflation risk, so within the formula, gold necessarily rose abruptly to counter act the risk of hyperinflation, which is what would be needed to prevent stocks from following their natural path lower. As suggested above, it won't work, at least not for long, with a more severe crash resulting later. This means assuming price managers are successful in keeping stocks afloat through the jobs report Friday, next week could be ugly once they spend this energy, along with moving closer to options expiry.
In this respect it's important to note that as forecast US index open index put / call ratios are not rising with falling stocks, which is supportive of the trend lower. (This has changed since this report was originally published.) So again, as options expiry approaches in a few weeks, the force of gravity will increase, and as suggested above, stocks could snap lower anyway. If the crash signatures are dismantled however, such an outcome could mean stocks remain at higher trajectories due to reaccelerating inflation, possibly leading to hyperinflation. Such an outcome would keep the Gold / Silver Ratio falling to historical norms, and then extremes, down in the mid to lower teens. In terms of other ratio related developments you should know about, the HUI / Gold Ratio put in an outside reversal higher yesterday signaling speculators think higher prices should be expected in the short-term, however the HUI / CDNX Ratio also put in an outside reversal to the upside, which should not have occurred if the move is to be sustainable.
That is to say, if this move higher in precious metals has entered its impulsive stage, the one alluded to above where the Gold / Silver Ratio takes a nosedive, then riskier stocks, represented by the TSX Venture Index (CDNX), should outperform the less risky represented by the Amex Gold Bugs Index (HUI), suggestive the apparent reversal in precious metal shares yesterday is suspect. Again, this is because of the stock market crash risk that could still become a reality as options expiry approaches. This is why I recommend you own bullion as opposed to stocks in core positions at the moment, because of this risk, which is still apparent in the ratios. If stocks can make it past options expiry without crashing, which is looking more probable each passing day they avoid such an outcome, then we will change our tune, as stocks should explode higher in discounting the hyperinflation risk. (See Figure 1)
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Good investing all.