The following is commentary that originally appeared at Treasure Chests for the benefit of subscribers on Tuesday, May 20th, 2014.
What does the truism 'stupid is as stupid does' mean? It means an intelligent person who does stupid things is still stupid. This saying comes from the movie Forest Gump, used as a metaphor to show that despite his lack of intellectual prowess, Forest did smart things, and prospered in life. Fast forward to today, and we have another instance this saying fits well in describing North American precious metals investors, few and far between as they are, which adds further layers of irony onto the situation. Because not only are precious metals investors a distinct minority in the West, with fiat currency regimes running amuck since we went off the Gold Standard in '71, the few there are involved in precious metals today participate via derivatives of the commodities (gold and silver), markets developed since then to aid in price management by creating artificial supply. Here, we are speaking of futures, ETF, and the derivatives of the derivatives - options.
In a related vein, while gold and silver shares expand the universe of precious metals ownership past the less than 1% of American's thought to own bullion, still, it's plain to see the West's investing public is not interested precious metals - not with manias in tech stocks, and bitcoin, and Kardashians. So in understanding the implications of this embroil, where the truism 'stupid is as stupid does' definitely applies, one should also realize the degree of future economic instability and financial pain for the average American will be substantial. Because Americana is broke and has sold its gold, and now depends on the printing press and any other form of fraud it's thought will fly, which will eventually bring total and complete collapse to the good U S of A, as the world is increasingly realizing the dollar($), as is the case with all fiat currencies, is a fraud. But hey - there are a lot of stupid and desperate people out there, so the farce goes on, with the Fed and their ilk still looking like sugar daddies.
Because if people were forced to live within their means, not borrowing future earnings on credit for present consumption, you would have a lot less investment bankers and a lot more gardeners than is currently the case. Of course time stops for no man, so in spite of efforts to avoid such an outcome it's coming - and it's coming fast now because the situation is out of control. Just because the American public chooses to live in a dream world, please, don't expect everybody to embrace your magnificence with the same bravado. Certainly the Russians have made it known they have no love for America. Russia wants to get paid for its wears, and is no longer willing to subsidize the West's inflated living standards by accepting non-market driven prices for its oil and gas, evidenced by recent new deals inked with eastern allies who share the same views and are willing to pay 'fair market prices'. Because of this, Europe (the West) will be forced to either pay up, by as much as 50% more, or go without.
For the West, the bad news does not end there however, nor the stupidity. Of course you would never know it looking at the markets right now - or if you asked a status queer. Stocks are up and interest rates down, along with gold of course. Because who needs gold with such a bright future dead ahead right? So you would think speculators would be betting on healthy and growing economy based on this picture, but nothing could be further from the truth. As you may know from following my sentiment studies, where even though the status quo would have you believe 'the future's so bright you gotta wear shares' because of the 'recovery' since 2009, speculators remain stubbornly skeptical regarding the stock market's prospects, evidenced by open interest put / call ratios generally far exceeding unity, not to mention short interest (viewed here) for the DIA and cubes (QQQ) have both shot up to two year highs, which is of course a large part of the real reason stocks are higher. (i.e. because of the perpetual short squeeze.)
So what's the bad news then? And what about the stupidity? With the distraction of a veracious stock market for the public to excess over, Western authorities, attempting to maintain the illusion of stability, have been increasing the export of meaningful quantities of gold to the East in order to keep prices subdued, where it is speculated supplies are now running short, which is the bad news for the status quo. What's worse, this is also the stupidity we were alluding to above, because one need realize that the West, and more specifically the US, is dishoarding itself of all its official gold reserves, which will become a 'sticking point' when it becomes necessary for sovereigns to independently audit such reserves in the future in order to set trade currency ratios. The stupidity part is the US thought it can continue to lie about their official gold reserves, which at present are on the books as the largest in the world, without the rest of the world never calling their bluff (yet), predicated on keeping gold subdued in negating the 'barometer effect'. Therein, and in this regard, it should be noted that gold has never been cheaper against the US monetary base - never. (See Figure 1)
Figure 1
This is because like a junkie, the West is addicted to all of the vulgarities associated with their fiat currencies (free money), centered in the Seven Deadly Sins. What's more, if you think of the West, with the US at center, and specifically the Fed, as a fiat currency pushing drug dealer, then one should realize the golden rule has been broken, where they are getting high on their own supply, and have been doing so for over 100 years. The fact of the matter is when you debase the currency, the fabric of society is not far behind. So again, the bad news is the West is boxed into a fiat currency corner (dependency) on the verge of collapse that will be triggered when they stop sending gold to the East, which again, is quite possibly getting very close based on observations associated with dated gold bars now being sent to Switzerland for refining. This is why Western authorities continue with their Houdini act. Please, look over here (at the stock market), while we debase the currency, hoping the 'stupids', which they think is you and me, don't notice. (See Figure 2)
Figure 2
And for the most part they have been surprisingly successful over the past few years with the combination of ZIRP, pumped up (falsified) economic statistics, and rigged market mechanisms, which in the end, have produced the desired results. (i.e. higher stocks and lower commodities / precious metals.) Again, for those of you who don't follow my 'true sentiment' studies, where we focus on open interest put / call ratios because 1) they are not commonly followed and therefore not acted on by the hoards of speculators; and, 2) because open interest put / call ratios measure exposures traders / hedgers are willing to hold overnight, meaning these are 'high conviction' trades. The net result of this is apart from the ratcheting higher of stocks that the bureaucracy's price managers would do anyway, they have a wind at their back in this regard because common sense would tell you stocks are overbought and should be lower; and, the opposite for precious metals. So, accordingly speculators predominantly / stupidly bet with these propensities, time after time, enabling the perpetual short squeeze in stocks (selling of precious metals), as the algos (machines) exploit these inefficiencies devoid of emotion. (See Figure 3)
Figure 3
As you can see above however, these tactics (algo related buying and selling) have consequences, which in the case of precious metals, and more specifically the Rydex Precious Metals Fund, which is a precious metals stock fund, has had the effect of selling it out, not that it can't be cut in half again in a 'liquidity event', which as you may or may not know, is a distinct possibility. (i.e. if not probable.) Such an outcome would be similar to the year 2000 sequence, where precious metals stocks were already 'washed out' when the broad stock market (provider of liquidity) topped out in March, but were still cut in half over the next six-months as margin debt related selling produced a 'scorched earth' outcome. And while its true investors have been raising cash lately, which will likely delay such an outcome (perhaps in the Fall), still, such a possibility should be kept in mind. With investors so in tune with such data these days one does wonder just what needs to happen to trigger a rout, especially with all the liquidity floating around, which is undoubtedly the question of the hour - fuelling the present mania to dynamics not witnessed previously.
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