The following is commentary that originally appeared at Treasure Chests for the benefit of subscribers on Monday, February 7, 2016.
Here we are back on the Pink Floyd standard, a song about the corruption of the 'old boys club' in the music industry of the 70's. Fast-forward to today, and we have the same situation on steroids gripping everything from business to government, which is nothing new. To think different would be naïve. The thing about it however, is it's pervasive extent these days, where even mid-level bureaucrats need to be lumped in with the real crazies at the top because of the degrees of complicity they are willing to participate in - bringing us to the fascist states they enjoy today. It's great to be a bureaucrat today, milking the public for all they are worth - and if Bernie Sanders has his way - this trend is set to surge further.
So welcome to the new standard, more commonly referred to as the 'status quo', where it's business as usual to rape, pillage, and plunder the public in order to get more - and to hell with the plebs. Lying, cheating, anything to get more these days - that's the modus operandi of the status quo sociopaths. This is of course the motivation behind the rigging of the stock market(s) - so that the greedy-bastard scam artists that populate the financial industry, and all their buddies (with corrupt politicians at the top of the list), can continue to fleece a dumbed-down and delusional mob. How they do this is by every means of debasement - morals, laws, currency etc. - and then people correspondingly accept the rigging of the stock market because society as a whole is becoming increasingly debased.
Enter the sociopaths in New York in charge of the stock market, and the clever assholes that figured out if we front run the stupid money (public) we can guarantee ourselves billions (along with controlling the general direction of the market), and the debasement process is complete. So you see I was right back in 2010 when I saw this coming (see here) - I was right. Was I right - or was I right? I was right in spades. In fact, it would not be a stretch to say the US stock market is nothing more than a video game these days (see here), completely dependent on speculator betting practices that control prices via computers. (i.e. the machines, Quants, HFT, prop operations, etc.) What's more, the end result of all this is there's only a loose relationship between fundamentals and economy to the stock market remaining, with bubble dynamic proliferation pervasive across the financial landscape.
Wouldn't it be funny however, despite all the best efforts of central planners to support this orgy, participants go a little crazy and stop playing - at least the way the fear mongers want. Because stocks are falling and there's talk of banks failing again as credit spreads and high yield continue to melt down. How can this be with central authorities all over the world talking negative interest rates and cashless societies? Shouldn't this be pushing money into risk assets? Because if it doesn't - Huston - we have a problem. This is when even things like loss of political power can negatively affect the markets. This is when politician's face the risk of being booted out by an unruly crowd, of which the world is awash these days - and it's getting worse fast. All we need now is for the status quo boys in the States to see the political landscape is about to radically change for real and lookout below.
Rent seekers of all varieties (think monopolies, bureaucracies, oligarchs, etc.) will be reeling if this happens, and they will fight back with more drastic draconian measures. That's what's likely coming as the year progresses, as spring approaches, if not sooner. We know this because of the collapse in the Dow / XAU Ratio (see below) since the beginning of the year, the most important relationship in the financial markets. (i.e. because it measures the status quo's current state of affairs.) It has collapsed last week as traders reached for positions in precious metals ahead of the Employment Report because they knew it would be weak, which played hard on the dollar($). Now we can expect a correction back up to test the broadening top (see here) break down, which should only take a week or two, with ETF options expiry the target for a turn back down once its effect is nullified until next month.
The fact the Dow / XAU Ratio broke down from the expanding triangle last week should not surprise anybody because it was bound to happen at some point. That being said, a great many people were surprised by the strength in precious metals, and some were not. Certainly precious metal ETF options players were not surprised, but at the same time perhaps too optimistic for educated observers (that's us) to believe in this move to the same degree they are based on their betting practices. (i.e. open interest put / call ratios remain depressed and falling across the sector - see here.) For this reason then, what could happen as options expiry approaches on the 19th, is the Dow / XAU Ratio could go back up and trade in the broadening top formation again, which would rattle more than a few of the new found bulls that piled in last week. (See Figure 1)
Once some degree of a retracement occurs however, and what would be confirmed by the turn lower in the Dow / CRB Ratio (see below) perhaps as early as this month, the Dow / XAU Ratio should break support (think 21-EMA) on the monthly chart at some point this spring / summer if this turn is for real, where again, after it's tested early this week, it should retrace higher going into ETF options expiry. In this respect, it should be understood that a strong monthly close in key precious metal measures is still required to confirm the turn higher, but based on last week's performance across the sector, one cannot help but be very encouraged this will occur. Precious metal indexes (ex. HUI) closed above the October highs, triggering a 'buy signal' that looks for real. Add to that the monthly HUI / Gold Ratio appears to have put in a bona fide reversal off profound Fibonacci resonance related support; where again, it easy to see a legitimate reversal in the sector has occurred. (See Figure 2)
That said, putting a top in on the Dow / CRB Ratio could take more doing, potentially needing to touch indicated Fibonacci resistance denoted above first because commodities (think oil) might still experience latent weakness associated with the a generally weak equity complex if stocks break down for real sooner rather than later. (i.e. the sell-off remains orderly with the VIX contained, but this will change at some point in coming weeks and months.) This week should see a low put in the stock market(s) to end the sequence that started in October culminating in a five-wave affair that will need to correct for some time. We know this because again, the Dow / XAU Ratio is almost touching the monthly 'swing line', and the move lower from the beginning of the year is extremely oversold on a daily basis. (See Figure 3)
Some might ask, 'what about the fact open interest put / call ratios across the precious metals sector are still so low?' Won't this nix any rally? For one thing, yes, this is a risk, and we will find out how big a risk going into options expiry on the 19th. However in checking the ratios here, you will see that open interest across the key measures we follow has been drying up for some time now, and is generally very low. What this means is general interest in the sector has been correspondingly low (a contrarian signal in itself), obviously allowing for a reaction based on this observation as well. That is to say, based on last week's performance in precious metal shares, the lack of interest was the signal, not the ratios themselves. Yes, it's getting even trickier if you can believe it.
And here's another twist, what we might see now is put / call ratios begin to rise with prices as hedges are put on to protect cash purchases, which for those of you who don't know, is the mechanism that supported the perpetual short squeeze in the broads these past years. If hedge funds and the like are going to begin taking cash positions in precious metal shares, given they are amongst the most volatile markets in existence, it makes sense that the more squeamish will hedge their exposures. One must remember, these funds want to be in business next year, where precious metal shares can turn your lights out in just a few short months if one is over exposed or exercises poor security selection. So, we will be watching for this as the year progresses now that it appears the turn higher for the precious metal sector is for real.
Can we be sure the turn is for real? In my opinion, yes we can. First you have the technical evidence discussed above. Then we have the fundamental side of the equation, more specifically the demand / supply deficits in gold and silver bullion that should rile COMEX soon, with only a few billionaires now needed to clear inventories out. At some point, some of these guys are going to look at the election prospects and panic out of stocks when they realize the jig is up in New York if either Trump or Sanders gets in the Oval Office - it doesn't matter which because they are both running anti-status quo tickets. And most assuredly, one of the places they will be looking to preserve their wealth is in precious metals. In fact, it may not be a stretch to speculate precious metals will be the first place they look because in theory they may be thinking they can park a lot of money in gold and silver.
The only problem is all the gold and silver is gone. It's gone to China and Russia - and that's a problem for the bankers because not everybody will be satisfied with paper precious metals (ETF's, futures, etc.), especially after all the scandals become visible. I won't comment on them here because I don't want to be sued, but take my word for it - the sh*t's going to hit the fan in paper gold land at some point - possibly sooner than we care to contemplate. But don't expect New York bankers to just give up, which is why if you are looking to plant new money in precious metal shares, one might do well to wait for ETF options expiry on the 19th. Because the low put / call ratios could cause quite a correction over the next two weeks as their influence on market direction takes hold via the machines.
Add to this the shares are very overbought on the dailies, and Yellen will be yelling on Wednesday (this usually sparks precious metal selling), so again, one might be wise to wait for a pullback into next week before planting serious money into the shares. Moreover, if the broads in the US complete the five-wave impulses to the downside discussed above this week, then stocks could be in for lengthy and substantial retracements to the upside in coming weeks. If we look at the S&P 500 (SPX), all we need to see is a vexing of the January lows to accomplish this, with a rally possibly as high as the 2000 area to follow. I am not forecasting this is what will happen, but it could. That being the case, even a more shallow retracement could still cause quite a correction in precious metal shares, especially with put / call ratios so low.
So again, in terms of pulling the trigger on investment grade size purchases in precious metal shares, patience may turn out to be prudent. A better time to buy might come in the vicinity of next Friday (19th). Let the machines work in your favor. Use the machines.
Good investing is possible in precocious metals.