The following is commentary that originally appeared at Treasure Chests for the benefit of subscribers on Monday, June 6, 2016.
We are revisiting a piece penned back in December of 2014 in an effort to draw useful comparisons pertinent at the time to current conditions in the markets we follow today - along with a new and important technical condition in the precious metals market right now exhibiting conflicting messages - 'a tale of two cities' if you will. The primary message behind the piece entitled A tail of Two Cities in 2014 was to draw attention to the growing income and wealth gaps between the top 1% and the rest of us, the same inequality that brought on the French Revolution, which continues to widen by the way, because of implications pertaining to the future. Indeed, fast-forward to present, and it appears our fears were not unfounded, evidenced in growing poverty rates and nationalist / extremist political movements around the world, along with a collapsing middle class in the West.
Of course if you listen to mainstream Western media, the picture would still appear 'sanguine' despite the radical changes gripping the status quo nexus, what Keynesians (think Fedsters) would have you believe is a healthy economy - which is of course a lie. In fact, it would not be a stretch to say what the 1%'ers have engineered is debt-induced stagnation that could possibly morph into a global Depression. Not that any such concerns matter to modern day aristocrats, or stock market for that matter, because as pointed out previously it's been reduced to a 'video game' by it's price managers via the machines, almost completely detached from fundamentals and reality. Instead, it's become a sentiment based gambling parlor now 'too big to fail' because it's importance is now 'systemic' - which is why it's defended by the status quo like the Bastille.
Indeed, like the aristocracy and bourgeoisie of French Revolutionary times, the class war in the West continues to accelerate and become more draconian, where left unchecked, these megalomaniacs would continue to consume working classes up and down the line until it was just Jeff Bezos, Bill Gates, and Mark Zuckerberg left standing in the room congratulating themselves on how they got it all - until a knife fight broke out. So with any luck, before this madness goes much further, we see radical political change before such a dark age arrives, condemning the proletariat to lifetimes of despair and suffering. There is another way you know - but it's not the American way - so it's likely to be a rough road in getting back to any kind of harmony within the human experience. First 'the people' will need to regain the surreptitious loss of its liberties to the aristocrats and bourgeois types these past decades, and then radical political reorganization will be necessary.
Russia is going in the right direction in this regard, moving towards democracy, and away from authoritarianism, as opposed to the West, which is going the other way - resembling a bad rendition of Orwell's Animal Farm. Rigged elections, the police state, and a complicit political class work together to keep central planners in Brussels and Washington at the forefront of a sprawling bureaucracy. However, if the brave souls currently fighting the fight in France right now are any indication, presently sanguine conditions on this side of the pond won't last forever, even as the pigs and their dogs seemingly continue to get their way. Viewed in the proper light, what you are seeing right now is the initial stages of modern day versions of the French and American Revolutions, evidenced not only in what is happening in France of course, but the radical change now gripping American domestic politics as well. (i.e. and it's working because the status quo boys are 'cracking up'.)
Because whether you realize it or not, the boys and girls in Brussels and Washington are in self-preservation mode folks, and the only way they will see continued success is by turning the authoritarian screws - stealing your liberties and wealth. In this regard then, one should expect nothing but more obfuscation, confusion, and lies from central planners moving forward, along with increasingly desperate measures, not the least of which being accelerating money printing in order to hide economies spiraling downward out of control. Eventually, as the numbers of disenfranchised from the system grows in critical mass, basic income initiatives will need to be introduced across the West, or the guillotines will be coming out. This was laid out in my work (series) entitled 'A Check in Every Mail Box' beginning in 2012, an eventuality envisioned almost five-years ago now.
It should all get kicked off with the Swiss Referendum this weekend, where they will be voting in a 'basic income' for all in order to keep the plebs placated with 'helicopter money'. So, first it's Europe (nope - it was rejected by Swiss), and then Japan, and then it will jump across the pond to Canada, another heavily socialized economy; and, then maybe even to the States depending on who's elected this fall, along with how fast the economy continues to implode. It's either that or Trump gets elected and follows through with all his 'make work promises'. Of course if he does that both the stock and bond markets should eventually feel the gravity of increasing circulation in money multipliers, and they won't like that as yields will need to rise in deference to rising prices, causing multiples to contract. So in terms of sequencing, as you can see on the weekly plot below, while the S&P 500 (SPX) might be on it's way to the channel and Fibonacci target in a counterintuitive move in coming days, once this occurs, a 'bone jarring' decline could ensue. (See Figure 1)
Because next year is a year ending in '7', which is historically significant in terms yielding negative outcomes in the decennial pattern. The idea here is the Fed is so worried about Trump getting in it has its prop desks going full throttle right into November no matter what the speculators are doing, making our sentiment studies less germane. We are of course already seeing this with most key open interest put / call ratios (see here) suggestive of extreme complacency, yet prices continue to grid higher. Perhaps as option expiry approaches volatility will pick up to better reflect this situation, however one should remain aware of the crazed determination of status quo players to support the democrats (Hillary) into election time as their (political) lives flash before their eyes. Confirmation the situation is truly serious would be signaled with a break above the 50-day moving average (MA) in the Dow / XAU Ratio (see here), where in looking at the monthly plot below, a rally to Fibonacci resonance based resistance at 250 would be unusual. (See Figure 2)
Thing is though, there's nothing bearish about this for precious metals, because a move to 250 in the above is inconsequential in terms of longer term prospects, where technicals on the monthly are undoubtedly bearish, where prices are set to continue plunging. What's more, and referencing the mixed technical picture referred to in the opening, where some weekly measures are 'stretched', it should be noted the vast majority of monthly measures across the precious metals sector remain unabashedly bullish, like the XAU / Gold Ratio pictured below, where it would in fact be appropriate this move is just getting rolling, with MA's and stochastics only recently turning higher. So be sure to take all this hawkish talk out of the Fed with a grain of salt, because it's nothing but opportunistic market manipulating double talk. Again, as you can see above, the XAU / Gold Ratio could treble from the lows before a structural breakout occurs, giving one an idea of how undervalued precious metals remain. As you can see below, precious metals might need to correct more, however once this occurs, they are likely off to Fibonacci targets signatured by Mother Nature. (See Figure 3)
Such a target, is the one pictured below, the Fibonacci resonance signature in the Gold / CRB Ratio (see below), suggestive while gold still has a great deal of upside, once the target is vexed, commodity prices will join the party. What does this mean? It means there's 'no free lunch', where helicopter money will eventually lead to some degree of hyperinflation on a global basis. Mother Nature makes sure there are no free lunches in this world. She makes sure every tab is paid, even if it takes a very long time because crazy humans think they have ascended above her influence. And when she comes to dispense her justice, the more humans disrespect her supremacy, the greater the price will be, which is a particularly poignant punctilio with respect to what is going to happen in fixed income markets eventually, as reflected below in the Gold / USB (30-Year US Treasury Bond) Ratio (See Figure 5), where it appears to be testing the break above the monthly 'swing line', preparing to break higher for real. (See Figure 4)
This is why pension funds are doomed, it's not because they are low now. Because if rates do rise, the funds - all funds not just the pension variety - will not be able to cope with the implications of crashing liquidity. Helicopter money will do no good at this time because the effects of increasing money multipliers will send prices so high everything will come to a grinding halt - crashing the multipliers again - but not before the economy evaporates. It truly is a no win dilemma here too. Again, as discussed previously, just look at Venezuela. Some degree of what is happening there today is coming to America. Wheelbarrow economics will be coming to a theater near you shortly - so get ready. You know the people who think those who prepare for such things are cute worrywarts deserving of ridicule. This tendency should finally come around to 'bite them on the but'. So stock up on necessities, because this is neither a joke - nor a drill - it's the real deal based on too much fictitious money. This will become all too apparent one day when the bond market breaks, and all that money starts looking for a new home in precious metals (and other genuine 'safe havens'). (See Figure 5)
And then we have the jobs report - what a con job. Thing is, these clowns can put out any number they want. Obviously, with the collapse in the numbers, they thought it was a good idea to put out a weak number this month to keep traders confused and off balance, sending everybody back to the other side of the boat sentiment wise. And this might happen in key precious metal ratios as well, where the logic is now that is evidenced the economy is collapsing, one need not hedge long exposures. In fact, for some (think idiot hedge fund managers), this might make naked bullish speculation in the derivatives market justified - you know - because they are looking for 'alpha'. Only thing is, because the Brexit thing will likely turn out to be 'Kabuki Theater' in hind sight if Brits remain true to form, with the jobs numbers forgotten by then, where the initial reaction of a 'no vote' will be viewed as a 'yes vote' for the status quo - yet another excuse to pummel precious metals and buy stocks. So, if the bearish COT situation for silver isn't burned off by then, and hedgers in the shares lose their desire to keep losing money against rising prices, sending open interest ratios lower, another counterintuitive move could be the result.
So we are not getting excited about Friday's jobs numbers, or the reactions in the markets. Because if you think the status quo boys are done with this situation, you haven't been paying attention these past years - as these people are psychopaths who will not stop until their toys are taken away from them, or the whole thing blows up. Along this line of thinking, at present we have precious metals commentators looking at the situation in Comex gold right now, suggesting delivery defaults this month, which is yet another reason to lift hedges. Given the times this has happened in the past, underlying conditions were not as bad as today (physical supply, the economy, etc.), still, in my opinion only the naïve would think some of the gold will not come out of eligible again to cover any deficits - that's if all these contracts are still standing in a few weeks - after the death threats or whatever else it takes to get these people (demanding delivery) to go away go out. What these people might be thinking (besides record physical demand), is they are front-running the Chinese because after they are slotted into the IMF SDR basket in September, they would be doing the same thing.
Or maybe it is the economy - or Trump - who knows? Bottom line is it doesn't matter if you're not too worried about the short-term. At some point the stars will be aligned for both bullion and the shares, and the sector will make a meaningful move higher on its way to a Fibonacci 21-year blow-off in the 2020 to 2021 timeframe. Until then, because of circumstances described above, the likelihood is we still need to go through further sequencing involving technicals and sentiment before conditions for a lasting bottom to the present consolidation have run their course. The monthly reversals in both gold and the dollar($) last month point strongly to such an outcome, so this possibility cannot be ignored, even with the weekly reversals going the other way off the Employment Report. Again, if you think status quo'ers are just going to lie down and take what is coming without a fight to the death, you have not been paying attention these past years. Just watch what they do at Brexit time. Everything will be coming up roses again on a 'no vote'.
Good investing is possible in precious metals.