The following is commentary that originally appeared at Treasure Chests for the benefit of subscribers on Thursday March 10th, 2011.
Orthodox religion is not what it used to be in our society, a society where individuals are now taught to worship the self and wealth above all else. Respect for your fellow man is increasingly becoming a scarce commodity these days with this departure from traditional morals, the morals our fathers built what is suppose to be the most advanced ever. So the irony this thick in this regard as our society's traditional moralities continue to fade, where at some point this process must be halted at the risk of such self destruction that our very survival would come into question.
Unfortunately however, because this lack of morality has now completely infected our money as well, as measured by a runaway fiat currency system, a system that because of abuses by it's beneficiaries, is now producing dangerous price increases in vital commodities throughout the world, which is threatening continued peaceful human intercourse within periphery economies now, and developed countries later. Of course it might not be much later if this is really crunch time, where rising energy prices are going to put a permanent crimp in people's lifestyles almost immediately, which will be exacerbated by falling asset prices at some point, with the only question being when. You will remember the timing thing was the central topic of our last discussion, where we continue to watch for a true sentiment change with bated breath. Again, most think a fall in the stock market is coming soon, which could turn our to be premature, ushering in historic extremes in everything from sentiment extremes to the heights commodity prices go in the interim.
Such an outcome would surely make it feel like a true hyperinflation event had beset us, and along the lines of today's discussion, likely cause new audiences to find religion in this regard, forcing them to turn to real money alternatives on an increasing basis in order to protect what little wealth they have left. So, the masses might finally find religion in precious metals soon, which in turn will force irresponsible institutions to do the same or be replaced, which could send gold and silver prices soaring. This is surely bound to happen at some point in the not too distant future, but it might take some time, say, until later in the fall to really pick up momentum. They say that under such circumstances the lights come on for people one by one, which can make for a slow start, however precious metals have been in a bull market for over 10-years now, so this gas been going on for some time now, meaning the acceleration phase could begin anytime.
Of course the establishment on Wall Street does not want this to occur because it would signal intensifying inflation, which is not part of the story line according to the Ministry of Truth, where we are supposed to believe inflation remains benign. And these people might be right sooner than one thinks if Bill Gross and the people over at PIMCO are worried about the government's monetization practices ending in June, which could send interest rates soaring, giving the opposite impression to the surface dwellers. So sure, we might get the wrong impression at first on the surface, but not long after interest rates begin to rise, both the economy and stocks would fall, taking everything else with such a development.
The only thing that's troubling about this view is the charts below don't support this vein of thinking. Instead, if we get breaks higher one would be compelled to think the inflation trade is still on, which is contrary to the view presented above. So, the question arises, 'which view is correct?' But perhaps a better question is, 'which view will prove correct first.' As with the question, the answer will probably turn out to be some complex variation of the two realities, perhaps false breaks higher initially, followed by a collapse to satisfy the deflationists, followed by a new monetization program later on once everybody has had an opportunity to stare into the abyss. Because at a minimum it's difficult envisioning precious metals shares (as represented by the GDM) not taking off against the broads (SPX) for the reasons discussed above (the lights coming on for people) at some point simply because it has not occurred in earnest yet, where the public still insists on ignoring reality. (See Figure 1)
Figure 1
And if we get a break above rectangle resistance in the GDXJ / GDX Ratio, again, it would be difficult not viewing such a development as 'significant' considering how long this resistance has been in place, ever since the recovery off the 2009 lows, almost two years now. Heaven knows participation rates are still dismal in precious metals as the public continues to ignore reality, attempting to make believe everything is 'just fine'. So who needs to buy precious metals shares under these circumstances right? Everything is just fine. (See Figure 2)
Figure 2
So, in order for logical scenario to play out, we need precious metals shares to remain contained for some time yet, correct into summer / fall with the larger equity complex as interest rates rise, and then break above the ratio related resistance outlined above as the hoards finally find religion in the precious metals sector. This is the likely path if the Gold / Silver Ratio has any predictive capabilities remaining in this regard, where it has reached fully extended (see Figure 2) Fibonacci resonance related resistance now just below 40, meaning the probability is high for a correction higher now. (i.e. especially considering we at the 1998 lows of 38 / 39 right now as well.) This would normally mean precious metals (and the larger equity complex) should correct lower temporarily as well, which again, must occur at some point.
Fast forward to present and although the GDXJ / GDX Ratio will probably not breakout of it's rectangle until a larger degree correction arrives, based on the continued strength in the inflation trade, this correction might not come until summer now. The reasons for this are covered in our ongoing commentaries.
Unfortunately we cannot carry on past this point, as the remainder of this analysis is reserved for our subscribers. Of course if the above is the kind of analysis you are looking for this is easily remedied by visiting our web site to discover more about how our service can help you in not only this regard, but also in achieving your financial goals. Along these lines, you should know your subscription to Treasure Chests would include daily commentary from either the myself or Dave Petch. As you may know, I cover macro-conditions, sector timing, and value oriented stock selection, while Dave covers the HUI, XOI, USD, SPX, and TNX technically each week. Mr. Petch is a world class Elliott Wave Theory technician.
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Good investing and best of the season all.
