The following is commentary that originally appeared at Treasure Chests for the benefit of subscribers on Tuesday, February 26th, 2013.
I am allowing my creative side a break this week, instead focusing on raw technicals for the S&P 500 (SPX), precious metals shares, and gold since prices are vexing important long-term support(s). In terms of what should be one's most rudimentary observations concerning present conditions in the aforementioned markets, obviously stocks are at 5-year highs and pressing higher, precious metals are at multi-year lows and approaching long-term supports, and nobody knows what to expect next because things are not going as expected. One would have thought with all the money printing precious metals would be performing well right now, but for reasons discussed in my last commentary (gambler betting practices, money supply related structural constraints, and intervention), and more (low inflation expectations and managed expectations in general), as you are likely painfully aware, this is not the case.
And although technicals associated with what should be a tradable bounce in precious metals will likely be upon us this week or next; still, no guarantee exists that once a relief rally takes place long-term supports indicated below will hold, as consumer deleveraging is set to engulf the world over the next few years, which would play havoc with the financial markets, liquidity conditions, etc. So, it's important not to get too optimistic regarding a lasting rally in precious metals until macro-conditions, sentiment (and other key technicals), and inflation expectations are properly aligned, which will not be until sovereign debt markets (and government in general) become suspect to a broadening audience. Again however, this will not occur until the consumer has completed the present deleveraging cycle, which is not anticipated until the end of next year, at the earliest.
Side Note: The good news here is this is already happening in Italy because of austerity measures and depressed economy, which means our thinking is correct, meaning the core West should be feeling the pain by next year as well. What happened? An anti-status quo candidate took almost a quarter of the Presidential election vote yesterday. The funny thing about it, and perhaps what spooked equity markets around the world, is he is a blogger, comedian, and anti establishment symbol. Apparently the revolution has begun in Italy.
In getting back to our analysis, it's important not to get too excited about the price action in precious metals yesterday either, because although the hedge fund community is aggressively shorting paper precious metals, as reflected in the most recent Gold COT and Silver COT, nothing has changed for retail investors concerning precious metals shares, as reflected in open interest put / call ratios for GDX and NUGT. (i.e. the two most popular ETF's.) So, although the large speculators shorted paper gold and silver in the most aggressive fashion since 2007 last week (not including between Tuesday to Friday), not all the elements are in place for a 'strong rally' just yet, not that a 'weak intermediate-term rally' cannot unfold under such conditions. Of course if the count for the SPX shown below is correct, general liquidity conditions should remain favorable right into spring / summer, so this will hopefully come. (See Figure 1)
Figure 1
Assuming we get some sort of minor degree correction in the next little while that takes the SPX back below 1500 for more than a few hours (mission accomplished yesterday), the stage will be set for the final advance, which again, should last into spring, if not early summer depending on whether prices are able to vault over important Fibonacci resonance related resistance at 1556. That's the hurdle to beat in order for the SPX to go parabolic in a final blow-off that could take it well above 1600 before topping out. If it cannot at least touch this hurdle before a larger degree correction grips the trade however, chances of surpassing this mark are lessened. Such an outcome would be a limiting factor for a precious metal share rally as well if history is a good guide. Still however, the Amex Gold Bugs Index (HUI) should be able to make it back up into the 500 area (best case) no matter if the HUI / SPX Ratio is about to turn higher on an intermediate-term basis, as discussed previously on numerous instances. (See Figure 2)
Figure 2
Heaven knows precious metals shares have been under-performing due to speculator betting practices (with the vast majority always betting bullish in options), which definitely allows for a bounce. And whether it begins this week, or next, is of little consequence in the big picture. However if we are going to bet on such a bounce ourselves, we would like to know the wind is at our back - right? (i.e. and when prices actually hit indicated long-term supports above and below and speculator betting practices are altered.) This is why it's so important to keep an eye on speculator betting practices, because high-level bankers (and their minions) will continue to pressure precious metals until Mother Nature forces them to reverse their evil ways, and embrace the metal of kings. This is of course already happening in non-core nations (China, Russia, emerging markets, etc.) and at pace not witnessed in half a century. But the question remains, 'when will this be forced on arrogant Western bankers as well?' Gold will explode higher when this becomes evident, where a move past the next Fibonacci resonance based resistance at approximately $2300 would signal it has entered a new paradigm in this regard. (See Figure 3)
Figure 3
Technical Note: Please note one should look at gold's trend support(s) in proper fashion, meaning its sinusoidal rails, which are defining the move. And although gold has not vexed the inner sinusoidal support rail since 2009, one should be prepared for such a possibility; along with knowing that move would not end the bull market.
Going the other way now -- is gold to $10,000 a ridiculous prospect? Not according to John Ing, who makes some good points in his latest. But just on a purely technical / historical note, it should be remembered that as gold's sinusoidal expands, so does the possibility of prices vexing such lofty trajectories. What's more, and in relation to a stock market that will not see the Dow much below 10,000 if central bankers continue to increase currency debasement rates exponentially (which is the case but the intervals are not regular), if the Dow / Gold Ratio is still going to unity (1:1), then it will be necessary for gold to move up to $10,000, not that it will buy much at the time. (i.e. think crude oil to $300 plus if inflation goes rampant.)
In the meantime, as of yesterday (as you can see in the attached above), precious metal stock speculators were repeating a negative behavior (buying more calls on dips in price), which is of course the definition of an idiot (repeating a negative behavior to the point of insanity), especially because they have been doing this for as long as they have. Why do they do this? Answer: Because they are stupid and greedy idiots who should be buying the physical metals and shares instead of the derivatives. This is why the bankers are getting their way - why demand is not overwhelming supply in the physical market - because these boneheads keep playing the aggressive (paper) alternatives. The bankers are diluting the precious metal market(s) with alternatives and new share offerings - and again - it's working in terms of keeping prices contained. (i.e. while losing idiot speculators their life savings - stop it stupid.)
Be that as it may, and as you can see below, the Gold / Silver Ratio has been correcting upward (gold outperforming silver is bearish) for just about six months now, which allows for a correction lower. This likelihood is represented in the count presented below, where after one more wave higher we should see this process evolve. (See Figure 4)
Figure 4
Add to this we are coming into a period of seasonal strength for the broads, which means liquidity should be plentiful (which is good for silver and the shares), and again, with any luck (speculator exhaustion?) the precious metals sector should catch a bid in coming months. At a minimum, we know precious metals shares should out-perform the broads over this period because the HUI / SPX Ratio has hit a significant support (see attached above), so at least they have this wind to rely on moving forward.
So again, what we would expect is one more minor degree decline in the sector, possibly to a new low as boneheaded large speculators (think moron like hedge fund managers in New York) attempt to defend their short positions over at Comex (and in sympathy with a recovery in stocks initially), followed by a key reversal (intra-day) spike low hopefully some time before the week is out.
The Beltway Boys are playing possum with the Sequestration thingy, hoping to attract some unsuspecting shorts back into the fray. If you check open interest put / call ratios today you will see this has been largely unsuccessful up to point because the public knows they are spineless twits, which may cause stocks to swoon one more time.
Does this cause them to delay Sequestration like they did with the Fiscal Cliff at month's end? Is this what causes the dollar($) to spike higher one last time before declining into summer. Would this be the buying opportunity we have been looking for in precious metals?
No matter what the reason, any spike down in precious metals over the next week or so should be bought.
So, get ready.
