The following is commentary that originally appeared at Treasure Chests for the benefit of subscribers on Thursday, December 31st, 2009.

Well, that was another year, and decade, one that was characterized by exacting prices for almost a century of easy money led by the Fed. And it continues today with bubble dynamics in economies and markets considered a normal expectation these days, explaining why gold was top performer over the past 10-years, and should remain in that spot moving forward as well baring silver's remonetization. That is to say, anybody, like Time Magazine, expecting smooth sailing over the next 10-years is most likely barking up the wrong tree with all the problems that still lie ahead for us, problems ranging from increasingly unmanageable debts and deficits, which are a result of the big turn in the credit cycle in 2008, to the pending demise of the dollar ($) as the world's reserve currency.

One of Richard Russell's more memorable observations from the past 10-years that relates to $'s future is found below, properly framing the context of how future prospects should be viewed, as follows:

"The history of reserve currencies reveals that the position of a country as a superpower (whose currency acts as a reserve currency) tends to rotate in a natural cycle of around 100 years. Will history repeat? From 1450 to 1530 it was Portuguese (80 years). From 1530 to 1640 (110 years) it was Spanish. From 1640 to 1720 (80 years) it was Dutch. From 1720 to 1815 (95 years) it was French. From 1815 to 1920 (105 years) it was British. And then the US dollar gradually dominated the scene until 2009 of a period of 89 years."

Now I would not necessarily mark the $'s demise in 2009, where as can be seen above 89 years could grow longer, however 2010 could in fact provide an interesting test in this regard. We know this because despite the rue monetary authorities are attempting to portray right now that tightening is actually an option moving forward, it's likely quantitative easing (QE) and monetizations will need to be stepped up next year as a result of all the spending this year, seeing the Obama Administration break all the records in this department. Indeed the bureaucracy and its socialists will increasingly see all this spending actually needs to be paid for in 2010, which they plan to do by increasingly taxing the wealthy, since foreigners no longer wish to pay for the crazy-headed out of control largesse these bozos seem to think can go on indefinitely.

So, those who are thinking 2010 will be a 'good year' should readjust their viewpoints in my opinion, and in fact really stretch those brain cells to include the concepts of bank runs, hyperinflation, and the $'s demise. This is because if equities turn lower at some point this coming year the test will be on - and QE / monetization practices will have to be ramped up again or wholesale Japanese style deflation will be the result. Remember from our last commentary we are watching the Nikki, and whether it can advance and hold above the monthly swing line in this regard. The fact it could not accomplish this in 2009, a year of unprecedented spending / inflation globally is not encouraging, especially in knowing from observing Figure 6 in the attached that cyclically (timing wise) the S&P 500 (SPX) has until April in terms of parallels, and then a great deal of pressure will be coming down on US stocks once again.

Until then the bureaucracy's price managers will continue to game our faulty and fraudulent markets until people's sensibilities are completely disoriented, and even the staunchest skeptics become believers, before the hammer comes down. A good example of what I am talking about in the expectations game will likely be witnessed next week (a new tax year) with so many traders / investors expecting tax related selling from those looking to lock in stock market gains, but wishing to avoid paying the taxes until 2011. You will remember from our analysis on US index open interest put / call ratios that hedgers / speculators have taken on a great many puts this cycle (January), and I think it's largely in anticipation of all this selling that is expected in January. For this reason then, although stocks are not at the extremes witnessed at the turn in 2000, which amongst other things was the last decennial transition, if we were to repeat a similar pattern here, which again, has been pointed out previously as a high probability in my opinion, then like the analog comparison with the Nikki attached above, stocks should top at the March options expiry, with the bears finally exhausted.

If history is a good guide then, like the year 2000, the end of March / beginning of April should mark the point at which hedgers and speculators stop betting on a negative outcome, allowing open interest put / call ratios to fall, ushering in a new volatility cycle, not that some selling next week won't get a few thinking the big turn might have arrived. Don't believe it however, as high put / call ratios on key indexes at present should be able to contain whatever selling occurs next week, like the first week in 2000. Of course this does mean some volatility will not appear, especially if the Canadian Dollar (C$) breaks the 50-day moving average, seen on the plot below. One should also note the presence of a 'slanted head and shoulders pattern' as well (along with the tight correlation to the SPX), which again, just about every speculator on the planet sees, making the likelihood of a full measured move being completed low. (See Figure 1)

Figure 1

Oh the C$ (along with the SPX) may very well break lower next week, as some tax related selling is likely to appear, however don't expect the selling to last if both history and rising put / call ratios have anything to say about it. So, in relation to the VIX plot below, while the diamond break lower may prove false next week, at the same time, in all likelihood so would indicator breakouts to the upside. And this will also mean a break above 65 on the Gold / Silver Ratio will also prove false initially, or at least go through an aggressive testing process that actually takes values back below the 200-day moving average. It would take small venture stocks, as measured by the CDNX (lots of people still thinking January Effect here), breaking lower to change my opinion in this regard, indicting any hope of credit conditions improving is history. (See Figure 2)

Figure 2

As for gold, I continue to think that the fact it topped on December 2, just like in 2004, is the pertinent observation here, suggestive it will not bottom until February, and then go sideways into August as falling equities not only rally the $, but also sap liquidity. This is of course the optimistic scenario as far as systemic considerations are concerned, where if the broads were to ever take out the March lows, bank runs, exchange closures, you name it will become a very real risk. Central planners would naturally be in spending money like drunken sailors under such circumstances, raising the hyperinflation risk, however one does need to wonder just how fast the public will be to allow round two of the rip-off that occurred last year with bank bonus madness still fresh in their memories. Expect the public to become increasingly vocal on issues like this, and let their politicians know about it, which could cause QE / monetization delays sufficient to cause equity weakness to become profound.

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Good investing all.