The following is commentary that originally appeared at Treasure Chests for the benefit of subscribers on Tuesday, March 5th, 2013.
For long time readers of my work, this subject matter will not be new. However, we will be taking it one step further this week in attempting to construct a 'playbook' for sentiment related conditions that will finally be sufficient to break the stranglehold presently suppressing precious metals. I say 'suppressing' because although currency debasement rates are definitely not what they were back in 2009 when precious metals were discounting previously unheard of gains; but still, they are sufficient to warrant 'proper perspective' on the subject - and not the 'falsehoods' fed to us via the mainstream media and central authorities on a daily basis. True money supply in the US is presently growing north of 10% on a year over year basis, which is nothing to sneeze at both from a historical perspective; and also, in knowing it could easily break higher easily with momentum building in this regard.
That being said, the general mood out there today is growing (and perhaps peaking) complacency due to all this money printing, where ironically, general price levels remain well contained because of contravening forces. What contravening forces are we talking about? How about private debt deleveraging, plunging incomes and savings rates, and the fact Quantative Easing (QE) is designed to bailout the bankers, not the public, which remains starved. You may remember previous discussion on why this is the case, because QE doesn't make it far past government coffers and commercial banks, with emphasis on the later. The powers that be know well that inflation would run rampant if the wealth were spread around. So, they pay themselves fat bonuses and salaries, bailout their crony capitalist buddies, and support the larger bureaucracy that keeps them empowered, leaving table scarps for everyone else. Welcome to Animal Farm.
And of course the powers that be will endeavor to maintain the illusion for as long as possible, where the fact they can hold gold and silver down whilst reaccelerating currency debasement rates must be viewed as a 'big win' from their perspective(s). The question then arises however, how can this be the case if our markets are in good operating condition? Answer: The problem is our markets are not in 'good operating condition' - they are both rigged and manipulated via regular and increasing intervention. What's more, as long as liquidity conditions remain fluid, you should understand that to a very large degree security price discovering depends largely on sentiment, and more specifically, speculator betting practices, which is why technicals in the markets can reach increasing extremes as markets are pushed in desired directions.
Along this line of thinking then, and to discuss present conditions in the precious metals market(s) as an exemplar, you will remember from last week's commentary that the sector is experiencing technical weakness not witnessed since the lows in 2008, this while money supply growth rates and liquidity conditions, as measured by stocks at multi-year highs, have been supportive of a far better outcome. One must wonder then, what could be the cause of such drastic conditions in precious metals even with the undoubted desire of subdued prices on the part of officialdom; and, the only answer that fits the bill is 'speculator behavior' - that being selling on the part of momentum chasing hedge funds, along with buying on the part of the bulls.
Again however, and the key distinction one must observe in order to understand what is happening here, is that unfortunately for all, buying precious metals for bullish speculators doesn't mean acquiring bullion, or even shares in the open market. No, for these characters, buying precious metals means buying leveraged ETF's, and options on these same ETF's and / or shares, or perhaps futures, and / or options on these leveraged products in dysfunctional and rigged market(s), where by design (via algos, etc.), their failure should be self-evident. (i.e. after such a long time.) Please note the key word here is 'leveraged', with the bottom line being, because of increasing greed and stubbornness on their part, the likes of which this analyst has not witnessed previously (with open interest put / call ratios on the GDX and NUGT plumbing all time lows), supportive sentiment conditions remain elusive.
What's more, until this changes, one should expect more of the same no matter how extreme general technical conditions become, where in fact, and in answering the question posed in the title and opening remarks of this commentary, 'what will it take' to cause a reverse in precious metals, the answer is obviously growing extremes - extremes that are sufficient to break the backs of these speculators. An irony associated with this picture is unlike what Bill Murphy used to say would happen to precious metals shorts, it will be the aggressive precious metals bulls, those playing in the options pits, futures, and ETF's that are the ones 'carried out on stretchers'. This process is now in progress, as gold and silver are set to test multi-year lows this week, just as the stock market is set to test commensurate highs.
And so it appears it must be death for the precious metals speculators before the sector will turn around on a lasting basis - no longer enabling price managing efforts on the part of technocrats. We are well on our way to such conditions in the futures markets, where in particular previous bullish small speculators are presently puking up positions in gold and silver that will bring sentiment conditions back in line with previous lows; but again, one must wonder just what it will take to engender a lasting change. In my opinion it may take new lows to get thick headed ETF players to finally give up the ghost in this regard, meaning multi-year support on gold at $1525 and silver at $26 might need to be penetrated before these idiot speculators get the message they will in fact lose all monies ventured if they don't alter their reckless ways. (See Figure 1)
Technical Note: Please notice gold should not close below weekly swing line support in order to remain buoyant, now just above the large round number at $1500. If it does not bounce back by week's end upon a breach, this opens the door to a fall all the way to the next Fibonacci resonance based support at approximately $1300. Is this possible with technical conditions so oversold? Answer: Perhaps not right away, but nothing should surprise you at this point.
As you can see above, gold has been below important support at $1550 three times previously over the past two-years, making another occurrence a four instance, which must hold. Again, it would not surprise me if it does not, especially if the S&P 500 (SPX) can close above key resistance at 1556, discussed last week. That being said, and taking both the above discussion and other key technicals into consideration, it's not likely such moves would be sustainable, likely setting lasting (multi-month) lows for precious metals and highs for stocks. (i.e. it will largely depend on gambler betting practices, so keep an eye on put / call ratios and short interests.) In terms of other technicals one should note, one cannot ignore the significance of the epic battle between gold and the SPX at 1550 (a ratio of 1:1); where again, it would not be surprising to see this metric breached by both going in opposite directions, but then reverse hard afterward in continuing secular trends. (See Figure 2)
Technical Note: One of Gann's top ten trading rules was you always sell a triple top. If the triple top is exceeded you are supposed to reverse this position and go long, however with internals now showing signs of stress for stocks, and March timing numerous important tops throughout both recent and distant history, this time, if the triple top in the S&P 500 (SPX) is exceeded I would not recommend such a strategy.
This should be the point where bearish stock market speculators and bullish precious metal speculators capitulate (evidenced in put / call ratio trends), which will be evident in the data during such a period. Look for some sort of deal associated with the Sequester and or subsequent budget talks during March to spark such an outcome. If history is a good guide, what is happening right now is this exhaustion is already setting in, which is in fact evidenced in the ratios, where price managers need increasingly bad news in order to attract unsuspecting shorts back into the market so they can be squeezed out again. So again, look for some sort of surprise associated with a deal the media / price managers can exploit at some point in March that sparks these final capitulations, where if sooner than later, could mark an important turning point. (See Figure 3)
Because once the Dow / TSE Ratio breaks out to the upside on the monthly plot above, the word deflation will be used increasingly over the next couple of years. And while such a breakout is not anticipated until later in the year, when it does come, one should expect rapid, reaching, and rude price declines across all asset groups (even precious metals), with the trend in private debt deleveraging intensifying into 2014. This is the plunge that will provide the set-up for the final manic like surge in precious metals going into 2021 (the Fibonacci projection target year for a top) that will be a result of central authorities increasingly losing control of the system, their wonderful fiat currency economy(s), and having to inflate money supplies with abandon. This is when the long awaited mania precious metals will finally arrive; again, possibly running all the way into 2021 - 21 being the Fibonacci number.
In the meantime however, gold has few friends, and gold stocks even fewer - not (Western) governments, speculators, nor their own managements - that continue to dilute their values away at every opportunity it seems. What's more, domestic price managers (includes hedge funds both bank run and collaborators) have done a truly impressive job of manufacturing the 'strong recovery' storyline that has enable the suppression of precious metals and propping of stocks (and credit), but it's getting increasingly stretched, so the dollar($) may finally be ready to top out, which would not necessarily be bad news for stocks, and pivotal of course, for precious metals. The next few days should tell us much in this regard, with the bottom line at present being don't short anything in US$ terms just yet - that's for sure.
But in terms of timing when a top for stocks and bottom for precious metals might be expected this month, in looking at the POMO, the largest injection is scheduled for options expiry on the 15th, which could cause a match of the top for stocks in 2000 at options expiry (remember the effect of options becomes stronger as expiry approaches) as well. That being said, there are a few too many top callers out right now for my liking, so it's debatable whether a top this month would be the final one the year. What's more, you will remember from last week we pointed out the larger count would need one more rally after a more lasting correction to complete the final sequence higher; where again, all this top calling right now might be confirmation such an outcome is in the cards. Here, we would be looking for a drop into late March / early April followed by one more push higher into late spring / early summer.
Because in answering the question 'what will it take to turn present trends in stocks and precious metals, the answer is obviously 'a great deal'. For precious metals, it's going to take a lasting change in sentiment on the part of speculators, where although we are seeing this in Chicago paper gold and silver markets, speculators in the shares remain 'flaming bulls', evidenced by open interest put / call ratios for GDX and NUGT continuing to fall with prices. (This is unbelievable folks - I've never seen a dumber and more stubborn crowd than these aggressive [paper playing] precious metals bulls.) Gold and silver are higher over night, but one would be well advised to be careful because this is likely just a bounce off support(s) (see above), where a break of last weeks lows could see further cascading losses.
And in fact, this is exactly what it will likely take to bring a bid back into precious metals, finally crushing the insane and incessant bullish betting practices of these idiot speculators. Never, in my years of watching markets have I ever seen a group of speculators more stubborn and void of respect for risk than these characters, and unfortunately, it appears they are not broken in terms of the present sequence just yet. So, in terms of the SPX / Gold Ratio pictured above (see Figure 2), what will likely need to occur, is a push above unity, meaning the SPX vaults above and gold collapses below 1550, in order to wake these idiots up. Perhaps then they will stop buying the dip and render the algo's ineffective. What's more, this may also stop the put buying in IYT (Dow Transports ETF), where it could be argued this protective put buying is doing much to hold the stock market up. (i.e. think Dow Theory.)
That's what it's going to take in my opinion. It's going to take something drastic like gold threatening to slam down through $1500, or precious metals shares breaking below the Golden Retrace, as measured by the Amex Gold Bugs Index (HUI) at 337 - 338 (61.8% retrace off of 2011 highs), now only 1% away, in order to break the collective backs of these speculators.
Again, I would be cautious concerning recent $ weakness, giving it today to put in a two-day reversal, if not tomorrow, making it three, before drawing any conclusions. If we do witness a three-day reversal this week, such an outcome could possibly bring the turns we have been looking for to the forefront, however don't forget about next week's options expiry and outsized POMO injections scheduled for that time, where again, given the persistence of speculator betting practices, we may still see some degree of extremes discussed above. And wouldn't this also be a good time for the Beltway Boys to come to some sort of budget deal as well - no?
Don't forget - these hedge fund types and their masters are a special kind of stupid, where they like to push the envelop to the breaking point when they can.
Clearly the precious metal ETF call buyers are in a world all their own in this regard.
Good investing all.