The following is commentary that originally appeared at Treasure Chests for the benefit of subscribers on Tuesday, May 29th, 2012.
On stardate 3842.3, the starship USS Enterprise, under the command of Captain James T. Kirk is transporting Federation ambassadors to the Babel Conference to discuss the admission to the Federation of the Coridan system. The system is a prime source of dilithium crystals but is also underpopulated and unprotected. Mining rights are disputed by many warring species who have strong reasons for keeping Coridan out of the Federation.
Formal negotiations are to take place on a neutral planetoid called Babel, but preliminary diplomacy begins aboard the Enterprise. Meanwhile, Communications Officer Lt. Uhura has detected an encoded transmission beamed from the Enterprise to a fast-moving vessel at the extreme edge of sensor range. The unidentified vessel closes in to attack the Enterprise, moving at extreme speed; far faster than the Enterprise can lock weapons on it. Kirk orders Thelev (a member of the Andorian delegation) brought to the bridge and questions him about his and the attacking ship's motives, though Thelev is evasive.
The ongoing attack damages the Enterprise and Kirk decides to try a ruse, shutting down internal power to make the Enterprise appear crippled. This lures the attacker to slowly approach and the Enterprise damages it with a surprise phaser counterattack. The disabled ship self-destructs, and Thelev reveals that both he and the ship were on suicide missions; he then collapses and dies from a delayed-action poison.
In the aftermath, Spock speculates that Thelev and the attacking ship were of Orion origin and the speed and power of the latter were consistent with a suicide mission, with all energy dedicated to attack and none for defense. Thelev's mission aboard the Enterprise, Kirk and Spock presume, was to sow distrust among the Federation members and weaken the Enterprise (by killing Kirk) prior to the attack. (i.e. to confuse and confound.)
Taken from the Wikipedia synopsis of the Star Trek Original Series in the 60's, the above encapsulates salient features (for our purposes) of an episode that was entitled 'Journey To Babel', where not surprisingly (considering Roddenberry's incredible talent and intellect), a meaningful sophistry (manufactured parallel) can be drawn between it and today's monetary system, it too on an undeclared and unavoidable suicide mission. Indeed, in what will come as a 'big surprise' to most once it unravels, you should know our present fiat currency based economy(s) are well within the time of what would appear as a suicide mission to sane trustees of a nations wealth. (i.e. think the Austrian School) And eventually it will be understood by all (when some degree of hyperinflation arrives) that the bad actors in charge of our money (economies, markets, etc.) today are nothing more than marauding power barons, interested solely in furthering their own hidden agenda(s). (i.e. much like the Andorians.)
Unfortunately for us however, we do not have James Kirk and Mr. Spock to take care of the bad guys. Nope - they have been allowed to run free since that faithful day on Jekell Island when the Federal Reserve was created, that group of 'bad guys' whose sole purpose is to defraud the citizenry of the United States (and world). And since 1971, when Nixon abandoned what was left of the global gold standard, they now do their dirty work (clandestine wealth confiscation via currency debasement) unrestrained by any measure associated with Mother Earth (historically currencies have been commodity based in order to maintain harmony with the natural world), where in doing so, have set us on what amounts to a suicide mission with respect to the larger economy due to years of excessive and unchecked growth in currency (of increasing varieties these days), GDP, etc. Yes, they have fostered quite the bubble economy for us to survive, where increasing money printing sponsors serial pockets of price increases, speculation, and popping noises eventually as all good things (heavy on the sarcasm) must come to an end. (i.e. God will come down on the Tower of Bable one day and confound their speech [fraud].)
What's more, the Fed does all it can to hide and confuse the public about just what they are up to (like the Andorians), not that an increasingly debased society would largely be concerned with such drivel. (i.e. what your favorite movie star is up to is far more important - right - wink wink.) Fortunately, America does have Ron Paul (Presidential hopeful) to help explain to the masses what honest money is, and why we should have it, and not the Fed. And Paul's message is becoming more popular as increasing numbers begin to feel the effects of loose minded economics and debased politicians (people become as debased as the currency), where as the bubble economy(s) deflate, painful readjustments must occur. And because the bubbles are so big these days, this insidious process will continue for some time while the Fed fights to keep its hot air economies inflated, but in the end such efforts will not help, only exacerbating the depths of economic depression that will be experienced as the system is cleared. Growing legions of Ron Paul supporters know this and are pushing for a return to constitutional money (money not lent into existence by self-serving banks) in order to get the process moving along so that the real economy begins to grow again.
Be that as it may, and whether Paul's efforts have a direct effect on ending the Fed sooner rather than later, the point is for all intents and purposes it will end at some point in the not too distant future, because like the situation much of Europe's periphery States are already in, America will no longer be able to pay the tab on a geometrically increasing national debt, and the party is over. There is no denying it any longer as the Debt to GDP Ratio in the US is already past the terminal parity mark no matter how you measure it. (i.e. it's much higher if measured correctly.) What this means is the US either stops printing the debt based money the Fed wishes used in order to enrich its owners (who are above any resemblance of good law); or, the situation will need to ultimately progress to some degree of hyperinflation, which is closer than you may think. Right now the Fed is holding back on the money printing because Bernanke is attempting to pop the commodities bubble so that his buddy in the White House has a better chance at getting re-elected (because if Obama is not victorious Bernanke will get the boot too), but with big banks blowing up all over the world (many soon to come) at an accelerating rate once again, the helicopters might need take flight sooner rather than later or the larger economy will implode as per previous discussion on Bernanke's Pickle.
But you won't know we are out of the woods in terms of this game of chicken Bernanke is playing with deflation (or at least a scare) until precious metals shares turn back higher decidedly, especially the small ones. For the large cap stocks, the most commonly followed measure is the Amex Gold Bugs Index (HUI), which will need to better 500 (both the 2008 and 2009 highs) before we will know a good head of steam is back in the global economy's fiat currency pipe; and, for the small caps we would like to point out the head and shoulders (H&S's) pattern in the TSX Venture Exchange (CDNX) will need to be negated, meaning prices would need to exceed right shoulder extremities at 1700. Here is a chart that shows this, along with pointing out its divergence to the rest of the larger equity complex. (See Figure 1)
The importance in knowing of this divergence is it must be closed one way or the other, meaning either the larger equity complex crashes with the juniors; or, the juniors snap back to the top of the more immediate range. (i.e. ~ 2500 CDNX.) So the implications for junior exploration stock holders, new investors, speculators, etc. are profound in this regard right now because if the CDNX doesn't just test the neckline of the H&S's pattern in coming weeks, and then continue to trace out the measured move (MM) down to 400 (that would hurt), it would quickly double (and likely go even higher subsequently) from present levels having completed a corrective zigzag. So, as you can see, the stakes are high right now, and all educated eyes are on the Bernanke to see if he's going to blink in terms of this game of chicken he's playing with deflation, or whether he will make the same mistake he vowed to never make (and apologized for) by allowing the stock market and economy crash a la 1929 style.
Somehow, I cannot see him allowing this to happen, however stranger things (worse mistakes) have happened theoretically. Be that as it may, and even if the Bernanke allows a deflation scare to get a little out of hand initially, if history is a good guide he will undoubtedly respond to such a development aggressively, which would likely mean substantive and increasing bailouts for the banks (QE3) considering their already fragile state, which would put a good deal of pressure back in the world's fiat currency economy(s). In terms of confirmatory signals, and as per previous comments (attached above) in this regard, watch for the Dow / TSX Ratio to convincingly fall back below the 2008 peak for a signal it's 'all systems go' in the inflation trade once again. (i.e. traders will bid up Canadian stocks on a relative basis when it is assumed inflation has a good grip on macro-conditions once again.) (See Figure 2)
And you will know its all systems go when gold and silver take off again too, which will likely be led by precious metals shares. (Note: precious metal share ratios closed with healthy gains against just about everything that moves last week giving us the weekly signal we have been patiently awaiting.) There is a great deal of chatter on the internet right now about how Goldman Sachs and the hedge fund community are naked shorting / spread trading (long bullion against a short the stocks) precious metals shares, especially the juniors, which have been annihilated by these characters. This could be what has created the divergence in the CDNX discussed above; where again, once 1700 is taken out on the upside this disparity should be quickly closed, doubling (and better) many of the shares. And as for gold (where silver was discussed in our last commentary), with the dollar ($) losing its reserve currency status at an accelerating rate these days (because of bad policy), the Bernanke will have no choice but to rev up the printing presses sooner rather than later to keep what's left of $ money supply velocity from falling any further. (See Figure 3)
As you can see above, technically gold is now 'oversold' on the weekly chart, which increases the odds favorably for a springboard off the channel top indicated above. For silver, word is getting around about the rather large descending and contracting triangle in the trade that breaks out at approximately $31.50 this week. Will it breakout this week? Perhaps - but even if it does don't expect it to zoom higher right away. Instead, watch for a good test of the breakout, which could even involve a break back below triangle support in order to fake out technical traders who ignore fundamentals. Fundamentals like $ reserve currency status erosion from multiplying sources which will eventually have a very real impact on prices in the US one day, sending them materially higher. And you can be sure this will be reflected in materially higher gold and silver prices ahead of time, where if not for any other reason physical precious metals constraints (supply issues) will eventually expose corrupt Western markets.
Because unlike the world surrounding the Tower of Babel the real world does not speak just one language, and foreigners have something to say about gold's place in our monetary system. (i.e. and they are shouting their views loud and clear via record demand.) Yes, the East continues to drain the West of its physical precious metals while the west continues on with its paper games in an attempt to slow the inevitable. What's more, soon the West will have to start the big print that will be so obvious to all that the present papering over of the problem will be insufficient in halt advancing prices any longer, especially when it becomes apparent US banks are as insolvent as their counterparts in Europe. Perhaps this is why foreign central banks continue to increase the pace at which they are accumulating gold.
So while precious metals could experience further volatility in the days ahead, one should ignore any such noise as exactly that; noise, and focus on the eventualities that will unfold in the longer term. Monetary inflation is about to grip the world with the US election, repeal of austerity in Europe, and sagging economies in Asia forcing the issue. But it's up to you to recognize this, as with the exception of the very few, US institutions are not interested in protecting themselves (and beneficiaries) against inflation. (i.e. they are on a suicide mission.) No, instead they are interested in painting a picture of low inflation in an attempt to continue the surreal dream / vision they have of the economy (low interest rates, rising stocks and profits, etc.) - that everything is just 'fine and dandy'. (to confuse and confound.)
Because of this deception what will happen is when the games have run their course(s) and physical precious metal supplies run out you will wake up one day and foreign markets will have gold bid much higher (some see $3000), meaning those without exposure to precious metals prior to such an event will have to 'pay up'. They will have to pay up if they wish to protect their wealth against the ravages of runaway inflation (i.e. hyperinflation.) As Von Mises pointed out long ago:
"There is no means of avoiding a final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as the result of voluntary abandonment of further credit expansion, or later as the final and total catastrophe of the currency involved."
Along this line of thinking it does not appear present day money changers are about to voluntarily slow the rate which we are debasing our fiat currency economies, which can only mean one thing - taking a stab at hyperinflation eventually. And while we may not get their before the entire system collapses, no matter, it will become clear to all at some point along the way gold (and silver) offer strategic refuge from the insidious theft that is monetary inflation, sending prices much higher.
Protect yourself with precious metals.
Good investing all.