The following is commentary that originally appeared at Treasure Chests for the benefit of subscribers on Monday, May 21, 2016.
The human race is approaching 7.5 billion people as the decade pushes on, with most struggling for survival, increasingly priced out of existence. In case you haven't figured it out yet, that's what's happening. That's why the cost of living keeps rising despite all the deflationary pressures out there - it's the survival of the fittest at work - which today means those embedded in positions of power of corrupt societies taxing the stupid, weak, and weary. The end result of all this ends up being increasingly fragmented societies enthralled within destabilizing and unsustainable embroils, like the European experiment, a make work catastrophe for bureaucrats now going horribly wrong.
Over the past hundred years man harnessed innovation in everything from economic theory (policy) to the computer, seemingly riding above the clouds. Now though, with so many aspirations and needs to satisfy, Mother Earth is buckling under the pressure. The oceans are dying due to acid rain; our drinking water polluted, and our food chain poisoned - setting us on a collision course with our self-evident failings, and a return to more primitive ways. Acceleration in process is what you should expect moving forward, where as general living conditions for the masses become increasingly unlivable, the laws of the jungle come into play.
Central to what all this will mean in political economy, is embedded bureaucrats (the strong? - or just corrupt) will increasingly prey on the weak, which will have the effect of making life so expensive, people will literally be priced out of existence. This is why Europe is in such disarray, and heading downhill rapidly. This will of course lead to increasing stress for all as authoritarian governments react to the perceived need in maintaining status quo, but it will be particularly hard on the entrenched poor, and the increasing numbers arriving at this destination from the middle class.
Just ask people in Venezuela if they are still happy with their socialism and neo-fascist disaster, where conditions are descending into sheer chaos. Take a good look, because this will be coming to America before you know it - no matter who wins the vote in November. And take a good look at the election too, as it may be the last one ever in America as the union succumbs to decentralization forces - again - especially the embedded centralized bureaucrat corruption. Federal government fascists are quickly becoming Nazis these days - the parallels are undeniable - that will eventually alienate more localized bureaucrats, forcing them to act in their constituent's best interests or perish politically.
Because once chaos hits the States, the US of A will disintegrate into something resembling a lost episode of The Trailer Park Boys very quickly, where whether prices are going up or down - most still won't be able to afford it. Central authorities will react to this with new inflationary policy like basic income schemes to appease the plebs, however all this will do is delay inevitable collapse as some degree of hyperinflation is released (pricing the unprotected out of existence), as such programs reinvigorate money multipliers. Because unlike Quantitative Easing (QE) for the Wall Street, QE for people won't be hoarded and reach the entire population base, which will have profound inflationary ramifications.
The important thing to realize here is central authorities will have no choice in the matter either - not like now because the markets are sanguine - even if the dollar($) and bonds are crashing. Because the way it will be looked at it is America needs to boost the economy, and if the economy is stronger, people will be able to afford higher interest rates - right? And hey - The Donald will renegotiate the empire's debt anyway - so no problem - right? This is all just talk of course, however one thing is for sure - a year from now things will look very different from today. And if it gets uncontrollable, which is a given, sending the plebs to war will be next to justify and hide their continued malfeasance. The groundwork is being done right now. (See here, here, and here.)
With all this going on, one would think gold and silver would be doing better, however it should be understood with all the interventions and games that go on to keep precious metals suppressed, this will take time. The Fed manufactured raid on precious metals last week is a classic example of this, providing us with yet another buying opportunity of 'low hanging fruit' that will ripen nicely in the years to come. As discussed last week in connection with comments concerning the Gold / Silver Ratio (GSR) moving forward, it should noted it's looking increasingly likely bullion prices will remain stifled by the bankers in the futures markets for some time. This means the GSR will likely trace out a more prolonged head and shoulders (H&S) pattern as opposed to cracking a fractal lower.
What would such an outcome mean for the shares? The answer to this question is found within the interplay between the above observation (official bullion suppression), key open interest put / call ratios supporting the shares, and the Brexit vote, where it appears the euro will likely continue to grind lower ahead of the vote on June 23, followed by a big rally afterwards on a 'no vote'. Why a no vote? Because Brits are conservative, colonial, and institutional by nature; and, they are scared of implications of a 'no vote', implying they would be making a go of it on their own. The polls confirm this view. Again, the fact a 'yes vote' will actually further empower central authorities and their evil ways (TTIP, job losses, liberty loss, etc.) doesn't matter because they are scared and voting with their emotions.
Such an outcome would actually be good for precious metals in the end, because what it would do is cause weakness in the euro prior to the vote on fear of a yes vote, followed by a relief rally afterwards. So if we are lucky, the situation over at Comex will improve prior to the Brexit vote because the Commercials see this coming, and the sentiment situation in the shares doesn't change (speculators are bearish, cautious, and hedging), opening the door to further substantial gains in July (beginning in June), possibly running into November off a positive pivot coming out of May (another historically significant pivot month). You will remember from previous conversation on the subject of monthly Fibonacci counts this was the preferred count, and here it is. The precious metal indexes are correcting nicely here in May, confirming the bullish count shown below. (See Figure 1)
Again, although the technical picture for bullion is suggestive one should not expect sizable gains until later this year at the earliest (see above), as with all-important turns in the precious metals sector, the shares have a tendency to lead. And it's likely they will continue to do so as long as competing currency interplay remains supportive, as alluded to above. This is why the Brexit situation is increasing looking like a bullish set-up that will unleash another bullish impulse higher in the sector post the vote. Again, a no vote should be good for the euro because the eurozone will be preserved, if only temporarily. (i.e. because the French are smarter and brave and will be the ones that leave first.) Just how much volatility we see in precious metal shares between now and the vote is unknown, however if the count shown above is right, another 10% to the downside (to 38.2% retraces) for the indexes is not out of the question. (See Figure 2)
And this could be seen as early as this week, being a post expiry week, where the influence of continued hedging and high put / call ratios in the ETF's, (in spite of the inflows denoted above), will be at their least influential point of the new cycle. Of course this is what is necessary to recharge the sector, so whether you still have further cash to deploy at lower trajectories or not, it should be welcomed by all. The $ will have a chance to correct higher, and then it will get creamed after the Brexit vote, which as you can see below, will likely help stocks too before it's all over. In fact, it would not be surprising to see new highs. Don't forget, the Fed is scared silly Hillary won't get the Presidency, which is looking more likely every day with both Sanders and Trump doing their damdest to knock her off her pedestal. (See Figure 3)
So here we are in post stocks and ETF options expiry week, and now we have Comex gold options expiry to worry about on Wednesday. With prices for gold and silver at respective equilibrium pricing (check here) after last week's drubbing, aside from currency volatility, the most important driver of prices this week will be the reduced influence of stock and ETF options, opening the door to additional downside for precious metal shares - especially if the $ strengthens - potentially due to a weakening stock market. It's a bit early to say how things will go the first few days of the week, however we will know much more by Wednesday, when we present our regular (monthly) post options expiry put / call ratio analysis, last seen here.
I'm not expecting any big changes with precious metal shares still elevated, however some erosion (lower in non-inverse issues) key ratios is not out of the question. But again, there's no use speculating on such things. As you know, our approach is to monitor the ratios (true sentiment), and then react to the 'reading of the tea-leaves' this exercise provides. So if key precious metal open interest put / call ratios (seen here) were in fact to fall substantially, in knowing this, one would be well advised to become cautious, if not outright bearish, because of all factors driving markets out there these days - the age of algos, extremely powerful computers, and the counterintuitive outcomes all this creates - gambler betting practices remains most important - even if under the guise of hedging.
Because if it were not this way - if pricing in markets today depended on 'fundamentals' - stocks would be much lower and precious metals much higher - all other factors remaining constant. (i.e. including accelerated currency debasement.) Instead, because of the computerization of the stock market the past 30-years, it's been transformed into a sentiment-based casino, where if you bet with the majority, you are sure to lose. As in Vegas, the house always wins because they have bigger and better computers that tilt the odds in their favor. Of course any market is like this because the few cannot pay the many, only in this case it's rigged to pay a certain few because they have the money to pay for the best computers - it's called High Frequency Trading (HFT).
This is of course why we always bet with the house, and against the crowd. Because if you don't you won't be in the speculating game very long. I have been doing this my whole life, but I didn't get really good at until about the year 2000 - when I was fortunate enough to grab onto the first phase of what will be the strongest precious metals bull market in history. And you know what - the best years are directly ahead running into 2021 - a Fibonacci 21-years from the year 2000 when the bull was born. Of course by then things will look very different from today. A cup of coffee at Starbucks could cost you $20, if you're lucky, and they are still in business. That will be the big challenge over the next five-years - staying in business - as the stagnation sets in - and people increasingly realize it's here to stay.
Good investing is possible in precious metals.