The following is commentary that originally appeared at Treasure Chests for the benefit of subscribers on Monday, November 17, 2014.
Follow the yellow brick road; follow the yellow brick road; follow follow follow follow the yellow brick road to your dreams (riches and wealth) has always been man's obsession, a sentiment beautifully captured all those year ago in Baum's classic, The Wizard of Oz. Back then, the merits of following a Gold Standard were better understood, well seated within the movie's imagery, not just 'the yellow brick road', but the silver slippers as well, both sending the message that by following the natural path, the path laid out by God (nature), one can have dreams come true. Of course following the American Dream (unbridled materialism) has become almost impossible these days unless one is in the top 1% because we have matured (economies are too big, faulty, and corrupt), where increasing numbers are losing their innocence as this is discovered, which was the primary message found in Elton John's classic, Goodbye Yellow Brick Road - the loss of innocence.
While the Gold Standard in valuing sovereign currencies is long gone since Bretton Woods, does this mean one should also abandon a Gold Standard in your life in realizing just how desperate men can become in their lust for things. Not if you embrace the wisdom espoused by Baum obviously, and not if one has an ounce of common sense. And no amount of increasing desperation, or clicking your heels (or stomping your feet), is going to change this - no amount of lying, cheating, or stealing (the mature American Way) is ever going to change the reality 'peak materialism' is here, and that while you may not be heading down a yellow brick road like Dorothy and her friends, your best foot forward is likely in precious metals financially. Because again, materialism is breaking down due to necessity (think to save the environment, peak credit cycle, demographics, etc.), which will eventually translate into the need to return to grounded currencies while the world economy reorganizes.
And things are moving fast in this regard right now, where as pointed out last week, an acceleration of the global currency war is currently underway, with the pace of competitive currency devaluations set to surge. Because the collapse of the Japanese economy is accelerating (due to demographics), which in turn necessitates an equally radical response based on the Keynesian Model Western economies are based (think monetary interventionism), where the effects of accelerating diminishing marginal returns necessitates ever increasing money printing, the precursor to hyperinflation as the negative feedback loop speeds up as well. What's worse, this condition is not isolated to Japan, it's a global (West World) phenomenon, with the rest of the world simply lagging the Japanese experience. The export of deflation from Japan, and the East, to the rest of the world will simply accelerate the larger global condition, which is not as acute, but still never the less, present. (i.e. because of the world wide population bubble.)
So again, if your idea of following 'the yellow brick road' is materialism, you've got a problem, especially if you are pursuing such an obsession using credit - hence the title for this effort - Goodbye Yellow Brick Road. Because when the credit bubble, which has never been more profound (think peak debt), bursts, unlike the 2008 episode, there will be no coming back to the way things were this time around. The fact its already like Orwell's 1984 is a clear indication the feds are losing control. There will be no going back to the comforts of Kansas this time, as the decentralization of the global economy will also accelerate, as evidenced in new regional alliances independent of Western influence being forged. Some think Western / Anglo bankers will be able to maintain global dominance via a new currency regime through the IMF, and to a limited extent this may be correct as international trade will slow, but not cease entirely. As for speculative finance on a global basis however, this is quite possibly the 'last hurrah' - although I have been wrong about these things before.
Be that as it may, no matter the extended outcome, still, one should prepare for an increasingly difficult world to survive in both spiritually and financially. As the global economy continues to contract and decentralize, both economic and military wars will increasingly intensify; witness a spiraling currency war that is now out of control (see the yen); and we have the 'war cycle' ready to turn back up this week according to Marty Armstrong. And it's not difficult to see something happen soon, with pressures in commodity-based economies going through the roof. With crude oil hitting multi-year lows last week, it should be apparent to educated observers that the downtrend was more than just 'mid-term election related', and more to do with a price smash to stimulate US consumption going into Christmas, not to mention the Russians are going to think a new 'cold war' has officially commenced. The Wicked Witch of the West (Western / Anglo bankers) has turned her computers loose on commodity prices in an effort to boost Western economies at everybody else's expense (especially Russia), so this would be a good time for Vlad to start something having the moral high ground.
Just what effect something like this would have on the markets is not certain in knowing the characters and levels of interventions we are dealing with, however one thing is for sure, many markets are showing profound divergences, not that they cannot get more so as the global crack-up boom accelerates. To think we have money printing that is off the scale in relation to just five-years ago and commodities in the tank due to currency / market(s) manipulation (by Western interests) would anger me too if I were Vlad. So let's see if something happens this week, and how the markets react, because although intuition may have you saying to yourself stocks should sell-off and precious metals rally if something happens, things may not turn out this way, at least not on a sustained basis. In this regard, beware the release of last meetings Fed Minutes on Wednesday, which is where the boys (and girls) like to officially jawbone the markets / expectations. Therein, with stocks in such 'fragile condition, and wealth effect consumption going into Thanks Giving Day weekend the concern, one should expect friendly dialogue (no matter what it really was at the time), especially if stocks are already under pressure. (See Figure 1)
Timing Note: Therein, if a correction is to be allowed between now and month end, then this week is obviously the time. For this reason, don't be surprised to see the S&P 500 (SPX) test the large round number at 2000 by Friday, or early next week, followed by another manufactured rally (like in October) into month end. Technical and sentiment based indicators are flashing a correction alert at this time.
Of course stocks may have already discounted robust Thanks Giving related sales, which may not materialize for one reason or another. (i.e. think the weather, war, or already over indebted consumers.) Just how long or deep any correction is allowed to go is a good question, however given how much the now insanely financialized economy depends on buoyant stocks, as evidenced by the staged 10% kabuki theater event in October, where we are suppose to believe the baffles were cleared, and its onward and upward from here. As you can see above, if Apple Computers is any indication, with the Fibonacci resonance related target some $20 above present levels, this would imply the entire NASDAQ market might be hitting new highs by Christmas. As Jim Crammer correctly pointed out last week, hedge fund psychology is suggestive this thing keeps screaming higher into year end because it's a must own stock, which is true of many technology mega-caps that could see breadth constrict further into year end as the indexes continue higher in an unprecedented manic blow-off. (i.e. a new all time high in the NASDAQ in such close proximity to the 2000 bubble would be a first.) And by the same token, this is why precious metals could continue to be sold down after this correction higher. (See Figure 2)
And while the recovery in precious metals is likely to continue this week due to the need for technical corrections in the various markets in play (think currencies, stocks, and commodities), make no mistake, Western price managers will be back at it going into year-end to ensure their bonuses remain robust, you can count on this as process (the crack up boom) accelerates. In the obfuscation game, the Fed has passed off the baton to the big banks and corporations (think buybacks), both slotted to increase their efforts next year, not to mention the Bank of Japan (BOJ), at least for now. This will all change at the first real hiccup in the markets, and liquidity conditions, necessitating some form of accelerated money printing from the Fed at some point (as the currency war heats up), likely some time in second quarter next year if stocks are topping out around that time. Remember though, once stocks do roll over for real, as suggested above in the Philadelphia Gold and Silver Index (XAU) / Gold Ratio, expect precious metals shares to remain under pressure for up to six-months past the turn due to deteriorating liquidity conditions, all-be-it the vast majority of losses have already been experienced. (See Figure 3)
This condition is well exemplified in silver as well, where as discussed previously, after this (likely) shorter-term rally is exhausted, a trip down to test the 200-month MA (in purple) is possibly in order, again, a victim of paper market gambler betting practices, fear, and constricting liquidity conditions once they finally arrive. (i.e. when the stock market turns lower.) With the referendum to increase gold reserves in Switzerland on November 30, which could be a game changer under the right conditions, one would be well advised to remain conservative regarding positioning going into this time if prices remain buoyant, given the potential set up. Normally (these days), precious metals prices drift lower starting mid-month going into COMEX options expires at month's end because of paper market speculator betting practices, where gold and silver calls always outnumber puts. And in reviewing key open interest put / call ratios and short interest across the shares, indexes, and ETF's, it should be pointed out ill-positioned speculators remain vulnerable to a sell-off here as well, where again, a 'no' vote in the Swiss Gold Referendum (at month's end) could trigger a violent reaction lower.
What's more, with rumors like this one, you are almost always wise to fade any resulting rally (which happened Friday), because more often than not it's a 'raid set up' for opportunistic hedge funds. So again, be careful if precious metals rally into month's end, because even if the Swiss vote 'yes', much of any resulting rally could already in the prices. One reliable indicator that tells us precious metals may have more room to run on the upside (think HUI to 190) is the Franco Nevada (FNV) / Amex Gold Bugs Index (HUI) Ratio (discussed here at length), which gapped lower Friday, indicating the possibility of a more protracted correction higher in the sector. Another is the all-important yen (to the leveraged carry trading hedge funds), which also looks like it might have topped out short-term on Friday. The follow-through this morning is quite disappointing because of a surprise negative announcement out of Japan overnight, which will have the speculators thinking 'more yen debasing', however this could wear off in just a day or two, allowing stocks to sell-off and precious metals to rally further.
Again however, one would be well advised to remember that even if this occurs, and in addition to a potentially dangerous Swiss Gold Referendum set-up at month's end, it's important to realize the world is entering a period of intensifying currency wars that appears set to explode in a frenzied madness in reaction to imploding economies, with the overnight example out of Japan an excellent exemplar in this regard. And again, this trend is set to accelerate due to accelerating diminishing marginal returns associated with money printing (the interventionist Keynesian response discussed above), where the Wizard (of OZ) is eventually discovered for a fraud, the Emperor defrocked if you will.
This is why Vlad, and other smart people, keeps accumulating gold on the cheap, because eventually the Western model is going to collapse, just like the Berlin Wall. Dan Popescu put out an excellent article last week that mirrors my thinking (discussed in my original harmonics studies), that the precious metals bull market will be blowing off into a Fibonacci 21-year cycle in the vicinity of 2021. Because eventually pressures associated with all the money printing are going to blow something up, whether this be stocks and / or bonds (especially junk), and precious metals will react through time. (i.e. after a deflation scare?)
See you next week.
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