The following is commentary that originally appeared at Treasure Chests for the benefit of subscribers on Tuesday, April 15th, 2014.
Just about everybody knows the story of 'The Tortoise and the Hare' from their childhood, perhaps the most well known of Aesop's Fables and the wise lessons that lay inside. Yet today, in our instant gratification engrained 'me society', where social media addictions and selfies flourish as attention deficit distraction, it appears these pearls of wisdom have been lost on most, at least this is how it appears. Because when one looks around, it's not difficult to spot increasing numbers of morally challenged fast movers who think they are getting ahead, especially in financial circles, often unjustifiably so and at the expense of others.
Yes, many examples of this can be pointed out with certainty in the financial world, ranging from the ravages of high frequency trading (HFT) (coincidentally we have the tortoise and the hare algorithm, which is an alternate name for Floyd's cycle-finding algorithm), to the suppression of interest rates by central banks and their ilk, all with the aim of 'getting ahead' (for the fortunate few), and staying there no matter what it takes. As with all mortals however, in terms of getting ahead of oneself, as was the case with the hare, one can become overly confident (and sloppy), which has a tendency to lead to mistakes. In the hare's case it was falling asleep, which allowed the steadfast and determined tortoise to prevail in the end. And in today's financial world, it's the West's disgorging of slow moving and passé real money.
Of course we are referring to gold (and silver) here, the ancient money, the money that allowed mankind to enter 'modern times'. Because good and honest money, money that reflects a broadly recognized basis, is a key ingredient to any sustainable society, which is something the West is about to find out the hard way. Like the hare, America, and all its Western allies, have chosen a different route with the adoption of purely fiat currencies (think Nixon going off the Gold Standard in 1971), which through time will debase every aspect of a society until extremes are reached that call for change. This, ladies and gentlemen, is the lesson the West is learning. Officials will undoubtedly keep pushing until the end, but make no mistake about it; change is in the air (hare).
Certainly the stars are aligned for major change, but from an earthly perspective nowhere is this more evident than in Russia's recent actions in support of its commodity pricing, discussed here at length in our recently penned 'Take That Ivan'. As pointed out, it appears the East has had enough of faulty and fraudulent Western pricing mechanisms that aggressively fluff up paper markets at the expense of suppressed commodity pricing, and after persevering patiently, like the tortoise, are now acting in a cold and calculating manner to return scarce hard asset pricing to more appropriate trajectories. The West, in its greed and avarice, has weakened itself with excessive debt and deficits that now leave it vulnerable and dependent on periphery commodity (Russia) and hard manufacturing (China) states that have accumulated outsized proportions of core (Western) debt.
Because Western economies cannot afford either higher commodity prices, or interest rates, not with bloated and ballooning balance sheets loaded with debt and stretched budgets. (i.e. both public and private.) This is why the West, who can be viewed as the hare in this analogy, always taking the easy way in a debased stupor (think lying, cheating, and printing money), is constantly fixing prices to create the illusion everything is 'just fine' and 'under control', which is a sentiment now rapidly moving away from the reality of higher prices, input costs, and eventually - higher interest rates. This is what the stock market is coming to grips with, that and the loss of the Easter Bunny (QE to infinity). And while central authorities will likely change candor later this year (in line with the latter half of the Presidential Cycle), loosening monetary policy once again, one does need wonder if the present tightening (think tapering) triggers an unexpected accident.
Along this line of thinking, it should be note that as per our last analysis on the subject, sentiment has finally arrived at overt complacency (like has been the case in precious metals), with speculators no longer responding to bad news and out of control prices with caution. (i.e. buying puts.) Apparently, they are finally convinced, that the stock market is a casino that always pays off, essentially a video game programmed by Wall Street and the Fed to always land on black. And while this has been the case for some, as better minds know, and common sense should tell you, this is not the case, where although nobody will ring a bell at the top, it should be obvious the equity complex is stretched based on every metric that matters, not the least of which being all important margin debt.
But it's no wonder speculators feel so confident about prospects for stocks considering central bank largesse is assured. If it's not the Fed its Japan (abenomics), or the ECB, that will continue the game of misdirection of look here, we are printing less money (think tapering), while other central bank cartel members take the baton. Plus, speculators know that while they shouldn't be expecting the Fed to become more dovish until the Fall, at the same time, they will continue to 'jawbone' expectations when need be, like this past week's Fed Minutes, causing a prolific rally in stocks, temporary as it was. (i.e. last week's failure was the shot across your bow that the top is in for stocks as it was the first of its kind in some time.) And if there were a real problem precious metals would be higher - right? Again, there is a great deal of confidence in the bureaucracy's price managers to keep a lid on gold and silver prices. Not many understand the true dynamics of what is occurring here via derivatives, algos, and sentiment driven markets, which is the cornerstone to all US markets by the way (which is why they are faulty and fraudulent), but this too will turn against the manipulators at the wrong time.
And it's already happening, slowly but surely. But, it will take time, which is why you must be like the tortoise and not the hare when it comes to investing in precious metals. You must be clever, determined, and patient (and above all not greedy), not participating in the derivatives (not feeding the algo driven machines that keep prices suppressed via actual expressions of sentiment present in the derivatives markets), instead focusing on accumulating the hard commodities, which in turn, disarms the manipulators. And if you are going to buy the shares then buy the shares, not ETF's, which divert demand away from the companies attempting to survive this mess. Again, like their broad market counterparts, whether intended (by the stock exchange bureaucrats) or not, ETF's not only take demand away from shares, they effect sentiment because of related betting practices and trading ease, which again, feeds aglo driven computer programs that search for these inefficiencies. So again, please, stop feeding the machines if you ever want your precious metals shares to appreciate. (i.e. I wrote of this many years ago now, when the threat machines posed became clear, where those who ignored this warning may be financially ruined and out of the race.) (See Figure 1)
Figure 1
This is the only chart that will be presented in this analysis today because it's important. It's important because it tells a story, both confirming the above thinking, and drawing a map of how to be a success and patient precious metals speculator over the next five-years or so. You may remember it has been my thinking for some time the previous metals bull market would take a Fibonacci 21-year to trace out completely, and as far as I can see, we are still on track for a top somewhere in the 2020 area, give or take a year depending when the count actually started. (i.e. year 2000 means 2021.) Where we are right now, as pictured above, is in the midst of a mid-term correction (in the metals), which for the shares, has been elongated due to all the derivatives related games speculators bring on the sector, which is why I coined the term 'Dumb Bell Rally' (not because precious metals speculators are dumb, which is generally true) for what to expect in gold and silver shares moving forward. (i.e. big rallies at both the beginning and end of the respective larger bull market.) Therein, and once any liquidity related weakness over the next six-months has run it's course, as was the case in 2000 (precious metals shares did not bottom for six-months past the top in the broads due margin related selling, where the shares should bottom sometime later this year, with tapering, possibly producing a print on the GDM as low as 300 [see above]) expect a vicious rally to build in the shares over the next five-years, culminating with an unprecedented mania in and around 2020. (i.e. see my original studies [Figure 8] presented in 2003.)
But nowhere is the central sentiment of this piece (be a smart and patient speculator if you wish to win the race in the end) better suited, than in the silver market, where greedy bullish (call buying) speculators continue to confound true market forces due to faulty and fraudulent Western (American) pricing mechanisms. And while this cannot last forever, at the same time, and as alluded to above, if one has been dumb enough to be playing with options (calls) or leveraged ETF's (or the options on the leveraged ETF's) over the past several years, then chances are you considerably poorer than before all this derivatives related buffoonery started. In the old days, prior to 2005 and the advent of GLD that kicked off the precious metals ETF craze, sure speculators would buy options on gold shares and futures, but would also buy the bullion instead of the ETF's. Now, they buy far less bullion and shares because it's easier (and more diversified [a sector decision]) to buy the ETF's, which again, whether intended or not (it was), has taken much of the demand away from the real McCoy(s). And again, nowhere is this more acute (important) than in the silver market, where both 'real demand' and 'true sentiment' have been badly damaged for years now. This is what has allowed the West's price managers to keep a lid on this relatively small market (the silver market[s] is smaller and more regionalized than gold, which is harder to manipulate, making it easier to control), which rubs off on gold.
Side Note: If you are not familiar with the particulars of this discussion (how all this confusing stuff works), check out my regular monthly sentiment reviews entitled 'US Index Open Interest Put / Call Analysis' for further clarification and information on one of the only true sentiment measures remaining for speculators to trade from. (i.e. because open interest put / call ratios are still not widely followed or acted on, so they still reflect 'true sentiment.)
Recent comments along this line of thinking as below, along with what I see in silver's future as 2020 approaches, as follows:
"Gold has been outperforming silver, as reflected in the a rising GLD / SLV Ratio (attached above), because of increased selling of futures by the bank cartel, along with the fact the open interest put / call ratios for both SLV and AGQ are half that of GLD. And it should be noted their short positions, although not as extreme, are still not supportive of silver outperformance. At the same time however, it should be noted the GLD / SLV Ratio is approaching the top of what appears to be a broadening pattern, which is where speculating in a meaningful reversal should take place. It's too bad people keep buying these derivative products instead of the real deal, because under the right conditions fundamentals would see silver prices pulling a bitcoin, running from $20 to $1,000 in a year.
Once faulty and fraudulent Western pricing mechanisms become redundant (think replaced by Chinese exchanges as price setters), this kind of move is possible, especially when oil and gas fracking bubbles are recognized properly, which will bring the need for hydrocarbon alternatives to the forefront, where they should be today. Silver is the best energy conductor used in the manufacture of solar panels, and for this reason, the demand will go ballistic one day. You will turn on your computer in the morning and silver will be up every day by multiples of what you are paying today. But you must buy the real metal and wait. That's the only way to play this game because the jackanapes in New York and Chicago will bankrupt you if one attempts to trade against their deep pockets and powerful computers."
So, you should know that in all likelihood, silver is the stallion both investors and speculators think it is; however, at the same time, the former group (investors, physical stackers, etc.) will not get paid until the later group of idiots run out of money. (i.e. because they won't stop buying calls until they run out of money apparently.) The good news in this regard is we may be very close to such a point, again, because of parallels reminiscent of the year 2000 in the financial markets at present. This means precious metals would remain under pressure for approximately another six-months, bottoming late Fall, and then embarking on a 'moon shot' into the 2020 timeframe discussed at length above.
In particular, as discussed a few months back in the article Silver Linings Playbook, the fun will start for silver when it gets above $33 and stays there. Exactly what causes this is not know at this time, where it could be a combination of several important factors including bullish speculator exhaustion (see above), to the increased roll(s) of foreign exchanges (and demand) in global price discovery, to the loss of the petrodollar, which is my favourite, to war, that could come sooner than Westerners care to believe. And again, although this may not become a reality for some time yet (think next year), it should be remembered that 5 to 7 year intervals within the investing world is viewed by the penitent man as a mid-term hold, so like the tortoise, please use your wits and patience skills in a constructive manor when it comes to investing silver, or precious metals in general.
Because it's coming - and when it arrives it will be like an unstoppable locomotive - not a turtle.
Thus, and bringing things into a more near-term view, apparently what we should expect is some degree of a repeat of the year 2000 sequencing over the next six-months, where depending on how badly liquidity conditions are impacted by falling stocks, central authority mistakes, etc., which will likely keep pressure on precious metals, with gold bullion the least affected. (i.e. in fact, it should rise.) But please, make no mistake, just because the Dow / Gold Ratio (DGR) goes up over this period of time, this does not mean either silver, or precious metals shares, will do the same as they are far more susceptible to localized influences, speculator betting practices, and general liquidity conditions. Of course while the final outcome may only rhyme with the year 2000 experience, the important thing to realize the general pattern is similar, meaning one should manage portfolio risk / structure / timing accordingly.
Once the Dow gives up 16,000, expect the declines in stocks to accelerate, which is when you will want to watch how precious metals shares react very closely. What would be constructive, is for both juniors and the producers to fall in tandem, but for the larger caps to bottom first, showing restraint on the part of still 'crazed speculators' (we know this from the predominantly still low put / call ratios), followed by the juniors, unlike the speculative bounce that originated last December. Such an outcome would signal an increased potential for a lasting bottom in the sector (like in the fall of 2000), a bottoming one could buy into with investment grade size (large) positions.
Until then, or some other sign of similar degree shoots across our path(s) like a hare, it's likely the penitent will prevail in the end.
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