The following is commentary that originally appeared at Treasure Chests for the benefit of subscribers on Tuesday, September 21st, 2010.
So what's all the hubbub about a nightmare? The charts are now confirming we are looking at significant inflation moving forward, and the price increases to go along with this, meaning we are staring down the barrel of an inflationary depression dead ahead. And make no mistakes about it; this will be a nightmare for the average citizen, literally wiping out the middle class financially in the process. First, via completive devaluations, monetizations, and the likes, the pace at which the cost of living will continue to shoot higher, which is what breaking out precious metals are signaling; and then, volatility in asset prices will reemerge, wiping out the savings of the average investor / pensioners going the other way (what the simple minded term deflation), leaving the masses increasingly in dire straits coming from both directions.
That's right ladies and gentlemen, you had better get a grip on the concept set that inflation and deflation occupy the same space at the same time at present (A Quantum Physics Enigma), where some asset groups, like real estate, will continue to fall (evidenced here) because of previous excesses, and others will rise primarily due to what inflation really is (money printing), leading to a desire on the part of increasing numbers to escape the currency hyperinflation a collapsing economy will necessitate. Again, this is what gold and silver are signaling right now, and why they may finally return to the inflation adjusted nominal prices seen under the crisis circumstances at the turn in 1980, which would have gold up over $2300, and silver over $100 per ounce.
Impossible. Don't tell that to Bill Buckler, a long-time monetary historian and market(s) commentator who knows what he's talking about. In a recent public commentary he does an excellent job of discussing money, its role in our existence, and why gold (and silver) will eventually return to their traditional roles in this regard. The scuttlebutt of all this in the end of course is that present fiat currency pricing of precious metals is ludicrously low, with it's 'real value' actually in the multi-tens of thousands. Again, it's for this reason we school the accumulation of physical gold and silver because at some point, and likely suddenly, precious metals will need to be returned to their traditional roles of stable means of exchange, where it will be advantageous for the powers that be to have it fully valued.
That's when gold (and silver) will have its day in the sun. The only real question then is how it will get there. Will it be a gradual process, where the populace accelerates accumulation, as Eric Sprott thinks? Or will the general population maintain its wrongheaded posture until change is forced upon both them and a surprised Western bureaucracy quickly losing credibility with its trading partners. This naturally implies a backing of fiat currencies for external transactions will need be implemented at some point to facilitate trade in an increasingly hostile world - a world characterized by otherwise imploding exchange units to go along with their economies. You should know such an outcome is inevitable, and that one needs to take advantage of still low precious metals prices and physical availability to insure personal wealth against catastrophic loss that will affect the unprepared.
And in expanding on our opening comments, if the charts we are looking at are correct, one should continue to have an opportunity to accumulate precious metals on the cheap in relation to other assets for a bit longer, where for example stocks appear on the verge of breaking out against gold, as can be seen below on the month Gold / Dow Ratio plot from the Chart Room. This ratio has looked as if it was going to breakdown for some time now, which did not make any sense if gold was rising and stocks falling obviously. Now it does of course, where it's possible gains in the Dow outstrip those of gold temporarily, just enough to convince the trend has changed before a false break reverses. Does this mean gold (and silver) will suffer extended and significant losses moving forward? Answer: No, such a development does not mean this at all, which is explained further below. (See Figure 1)
As mentioned above under RSI, it may need to breakdown temporarily due to wrongheaded gambler betting practices, with the thought process being something along the lines of 'with the seasonally weak period for stocks just about over, there's no use buying deflation insurance anymore.' This is the best reasoning for falling put / call ratios on the precious metals ETF's and futures options I can come up with anyway. (This will be covered in greater detail on Thursday.) Along these lines, with COMEX option expiry on gold and silver contracts coming up next Monday, and equilibrium pricing closer to $1225 than $1280 on gold, again, don't be surprised if prices are managed lower temporarily given what's at stake, meaning the Gold / Dow Ratio could break lower in the process.
You see the bankers who wrote some 25,000 calls this month down to the 1225 strike from here don't wish to pay if possible, and more importantly don't want precious metals prices to run away to the upside, so expect them to attempt toppling the market(s) (silver too) over, as is their custom as expiry approaches. And if they do get some material selling initiated today, with paper gold open interest put / call ratios on gold (and silver) low (see here), then we may see also see a material breakdown in the Gold / Dow Ratio, however again, unless a meaningful and lasting change in sentiment grips the market (think ETF open interest put / call ratios), such a break should ultimately prove false. This sentiment is supported by the observation not only is the Dow / Philadelphia Gold and Silver Index (XAU) Ratio NOT poised to break higher, open interest put / call ratios on precious metal share indexes (the GDX too) remained high post options expiry from last week (again I will cover the post expiry picture in detail on Thursday), meaning getting the shares down will prove much more difficult for the bureaucracy's price managers. (See Figure 2)
Post expiry open interest put / call ratios on GLD and SLV have dropped considerably initially, meaning volatility should be expected at this point with both a Fed meeting and COMEX options expiry dead ahead, however this can change as the cycle matures. What's more, and again, since open interest put / call ratios did not fall for precious metals share indexes (XAU & GDX), this should also support prices, especially with the broad averages are set to break higher after a consolidation, likely to occur this week timed to bring all prices down to manipulate gold and silver lower running into next Monday. Of course with POMO operations every second day this week such plans might prove difficult, however you can be sure our price managing bureaucracy will try. Again, the end result will likely involve the broad measures of stocks outperforming gold and silver for a period of time that is undeterminable, but should not prove lasting or material. Annotations below on the S&P 500 (SPX) / Gold Ratio explain what should occur technically. (See Figure 3)
So, the question then arises, 'in time, is it possible gains in precious metals shares outstrip those of both the broad averages and underlying metals? Answer: Yes, in fact, as the cycle matures and progresses into the heart of the larger degree move, gains in precious metals shares should outstrip those of both the metals and the broad measures of stocks. And although no chart based analysis will be provided here today in allowing post expiry put / call ratios on the ETF's and share indexes to mature a bit before attempting to draw any conclusions regarding sentiment (and sustainable betting practice trends moving forward), you should know that right now this is what post expiry distributions are suggesting. Now considering market participants have largely become bipolar in nature these days due to all the shenanigans in the markets, and sentiment is basically optimistic from a long-term perspective, things can change, however for now the stars appear aligned for a bull market in precious metals to be fully expressed through it's various stages, with the shares leading at present, a sign of future gains.
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Good investing all.