The following is commentary that originally appeared at Treasure Chests for the benefit of subscribers on Monday, August 3, 2015.
Do you have an uneasy feeling regarding the future? Are you feeling uncertain about your future financial prospects? Do you seek out meaningless distraction at every opportunity like some debased hedonist perpetually seeking to escape reality? Do you view government as benevolent and serving your best interests? Do you depend on government and serve the beast? I could go on forever with these questions, but for the purposes of this piece we want to bring you to an understanding that the larger bureaucracy, the powers that be, have brought us to a very dangerous place that has most people buffaloed via either denial or delusion, essentially attempting to keep our society in a stasis of suspended animation - floating above all those nasty problems below - if you only believe.
And it doesn't end here in terms of thought control. Good fascists not only want you believe in their right to control your thoughts, but more, along this line of thinking they also want you to suspend personal beliefs, common sense, the laws of physics, and your rights and liberties. You name it, and they want it suspended if it does not serve their interests. And believe it or not, amazingly, they tend to get their way for as long as the grand illusion keeps going, which for the West means maintaining the stock and bond markets in states of suspended animation, propped up by all the lies and malfeasance we have been told is financial engineering, plunge protection, and the status quo. The status quo becomes necessary and accepted this way. And anybody who questions it is a traitor.
So here we are, floating along in a dream, with the status quo confident about their ability to maintain the illusion despite the death of the middle class. These are the conditions necessary for epic failure, especially considering central planners are now out of bullets. Sure, the Fed can bring on QE-IV anytime it wants, and this could keep the rentier class in Champaign and caviar a bit longer, with securities markets hovering at the highs; however, the rate at which the middle class (everything periphery) is being decimated due to the accelerating hollowing of economies is both undeniable and visible to all, which will make it increasingly difficult to perpetuate the scam. Exactly what ultimately pricks the asset bubbles is unknown, however the eventuality of such an outcome is not in question - just the what causes it (speculator exhaustion [my pick], credit spreads, war, etc.) and when.
In terms of the 'what', it should be remembered emboldened fascists always bring on war, and in turn their own demise. And this time will be no different as the colonies attempt to reassert their independence away from the American Empire. You can see it if not looking through the rose colored glasses of mainstream media. The global political landscape is being reshaped via decentralization, which is accelerating. And this acceleration will become more profound as process continues to unfold, where credit spreads are suggestive we entering the danger zone, meaning serial asset bubbles are ready to be popped once again.
Yes, but what about the fact central banks control all prices now. Doesn't this mean a collapse will be avoided this time, as is bandied about by the talking heads? In the first place, central banks do not control all prices, even though they attempt to influence far too many, too much of the time. That is to say, while it's true the markets have indeed been rigged by status quo bureaucrats up and down the line, and that their efforts have become increasingly profound through time as the importance of bubble economies in the macro has also increased, it should be understood by all that short of shutting the exchanges, which is exactly what happened a few weeks back to the New York Stock Exchange (NYSE) under the guise of a 'technical glitch', to a large extent, large enough to still control price discovery, sentiment, expressed via speculator betting practices in derivatives markets, still controls cash market direction.
Hogwash you say. What about LIBOR rates for example, those prices are administered. On this account you would be right - LIBOR rates are administered. And they are still administered despite the very public scandals because that's the way things are done in London (and West) these days. The oligarchs and their bureaucrats wish to maintain the status quo (Keynesian utopia); and they will say or do anything to accomplish this goal including lying, cheating, and murder. So, for the stock markets they have money printing, prop desks, (increasingly sophisticated) computers, algos, and high frequency trading (HFT) to help in this respect - but most importantly - up until this point they have also had foolish speculator / hedger betting practices to fuel the perpetual short squeeze in stocks.
Now however signs of a profound exhaustion in this condition are becoming evident. We know this via our 'true sentiment' studies (seen here), where it should be understood that aside from naked shorting, open interest put / call ratios are the truest measure of speculator / hedger sentiment in the market(s) today, markets largely controlled via computers (machines), algos, etc., because this is a measure of what they are willing to hold overnight, and longer (think hedgers). And what should be recognized then, is this is the condition set that has been holding stocks in a state of suspended animation these past years; however, unlike LIBOR, the sentiment mechanism is still operating, and set to exhaust itself once speculators / hedgers no longer perceive the need / opportunity to bet on equity market losses. Again, this is now occurring, as evidenced in generally falling key open interest put / call ratios (seen here), which are declining and approaching dangerous levels sufficient to trigger a larger degree flash crash.
Why are key open interest put / call ratios falling, with some now below unity?
Answer: Because of speculator exhaustion, where either psychological or financial need is forcing addicted participants to cease this negative behavior. (i.e. buying puts.)
Why a flash crash and not a longer term / less dramatic decline?
Answer: Because of intervention. Once bearish sentiment has truly exhausted itself, which again, has been evident in rising and buoyant open interest put / call ratios these past years (since 2009), officials will be forced to shut the exchanges when the risk of a big decline presents itself. Only this time, with an unsupportive sentiment picture (declining put / call ratios as speculators / hedgers attempt to catch the falling knife), meaning no bearish fools for the machines to squeeze, prices will simply collapse uncontrollably, until the exchanges are closed again and again. This will occur repeatedly until speculators start buying puts on balance again, reinvigorating put / call ratios and short interest measures. Of course the fact mutual fund cash levels are at historic lows, and margin debt is at the highs, doesn't hurt this case either.
Moving onto precious metals, it should be realized the same dynamic largely controls prices here too. Yes, there are raids and interventions in precious metals markets, but nowhere near levels the gold promoters would have you believe. Such events are not the primary culprit in weak precious metals prices. If this were so, the boys in New York would not play the game. No, the smart ones know how to shear the sheep, and they know the role true sentiment plays. So they turn the computers on permanently bullish paper market precious metals speculators in the ETF and futures market, which is the mechanism used to keep prices controlled in what is viewed as an 'officially sanctioned traded', which is why despite regulatory transgressions (think HFT front running, spoofing, etc.), regulators do nothing.
And as stated previously, as long as faulty and fraudulent Western pricing mechanisms (think ETF's, COMEX, LBMA) continue to set global prices, this will not change until either sentiment changes, or price discovery moves to an alternative market regime. (i.e. think Chinese markets.) In the good news department, it should be noted sentiment in the paper gold and (to a lesser extent) silver markets are changing, where in fact conditions are building for a reversal. Hedge funds are net short COMEX gold for the first time in history, which is a developing positive, however ETF speculators remain lost in space, still buying every dip, suggestive more pain needs to be experienced before this negative behavior ceases. This increases the risk gold will fall through key monthly support at approximately $1044, the 155-month exponential moving average. (See Figure 1)
What is encouraging about the possibility of a lasting bottom here on top of the sentiment change in paper gold discussed above is numerous important technical levels are now being vexed, with $1080 (the 50% retrace off 2011 highs) first on the list due to its importance in the larger harmonic signature. (i.e. hence the big bounce off $1080 on Friday.) Moving onto the Dow / Gold Ratio (DGR) to bring more perspective into the picture, you will remember from last week that 17.8 is an important Fibonacci resonance target, but let's not forget the bigger picture, where vexing this trajectory would also put it in the 38.2% retracement zone as well. (See below.) Again however, it should be remembered that because of the crazy ETF speculators (think hedge funds and retailers) in this space are still buying every dip, evidenced in put / call ratios still below unity across the sector, it's likely more pain will need to be experienced before these idiots give up the ghost, meaning the DGR might need to see 20, or (heaven forbid) 25 (the 50% retracement) - who knows (they are an arrogant and stubborn bunch - just like the gold promoters). (See Figure 2)
And this is why precious metals shares can get cut in half again - because of this mindless arrogance that is pervasive in Western culture today. In terms of the Amex Gold Bugs Index (HUI), once the large round number at 100 goes to the downside, the next largest interval kicks in as the number to watch, which in this case, happens to be 50. If the HUI were to reach 50, which is questionable as you will see in a moment, then one would be compelled to buy simply on the basis it can't crash all the way to zero, the next 50-point interval. In terms of the Gold Miners Index (GDM), where we posted our target at Christmas here, looking for a low of 300, this translates into another 27% decline from present levels, which is definitely 'doable', which in turn would put a target of approximately 80 on the HUI, which is as good a target as any. (i.e. as long as sentiment improves or 50 comes into view.) The Fibonacci resonance signature supports that 300 will hold on the downside, so position traders (that's us), must pay attention as these levels are vexed. (See Figure 3)
To reiterate a very important point from above, again, let's say the HUI hits 80 (and GDM 300), but sentiment does not improve - what then? The most likely outcome here would be another shallow bounce, followed by more bottoming action, possibly leading to a vexing of the 50 area for an extended period of time. (i.e. 6-months to a year?) Again, assuming gold price discovery remains under Western control during this period, how all this transpires depends on the pace at which idiot (permanently bullish) paper market(s) precious metal speculators finally give up the ghost in derivatives markets, which essentially means when these knuckleheads finally stop buying more calls than puts. (i.e. driving open interest put / call ratios above unity.) Because in the absence of constant and expanding QE, no market goes up these days unless it's being squeezed higher, not commodities, stocks, or most certainly precious metals. (i.e. which in fact the status quo wants contained at any cost.)
So please, attempt to keep an open mind on all this, because again, both bullish paper market speculators (note bullion buyers are not included in this group because they are savers) and gold promoters are 'dug in' for the long haul, so it's likely going to take their deaths (financial, psychological, etc.) in order to see a noticeable change in sentiment. This, combined with liquidity related volatility once the broads top out, is why the HUI can vex as low as the 50 interval before its all over, because stubborn gold bugs are dug in like an Alabama tick on an old hound dog, and stocks are still rising, spinning off marginal liquidity related benefits. That's why, ladies and gentleman, the bottoming process in precious metals, with particular attention on the shares, could get more ugly. (i.e. choppy and drawn out.) Bankruptcies will need to occur and serious consideration to the prospect of deflation by speculators will need to be widely perceived (causing them to cease buying calls) before any lasting turn higher can reasonably be expected.
The good news in this respect is Western stocks had generally strong monthly closes across the board, taking key ratios to kick-off points for blow-offs into coming months. Again, this is very good news, and something we have been patiently waiting for some time. What this means, is we should witness the collapse of the CBOE Volatility Index (VIX) in coming weeks (months) in conjunction with further muted gains in stocks as internals likely decay in record proportion. Apparently 6-stocks are doing all the lifting in New York right now. The question is, can that number become less. Only the shadow knows the answer to that question, however one thing is for sure, once the metrics discussed the other day are achieved, the Fibonacci based targets for the SPX / SLV Ratio, Dow / Gold Ratio (DGR), and S&P 500 (SPX) / CBOE Volatility Index (VIX) Ratio, which are at 168, 17.8 (to 20), and 220 respectively, the present state of suspended animation stocks have enjoyed these past years will come into serious question, question sufficient to have seasoned position trading speculators take notice, along with making sizable bets.
Because although it's true blow-offs in present cyclical trends could extend further, one thing is for sure, these moves are very long in the tooth (records in some cases), and due to expire at some point in the foreseeable future such that only a little patience should need be exercised if the targets delineated above are bettered. (i.e. nobody's perfect in this kind of thing, which is why good speculators wait for extreme opportunities before acting, because overshoot is always possible no matter the extremes.)
And with that, we will end things here today.