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It's All About Interest Rates

The following is an excerpt from commentary that originally appeared at Treasure Chests for the benefit of subscribers on Monday, July 5, 2016.


 

As far as the markets are concerned, it all depends on interest rates. Because disenfranchised millennials don't give a fig about how high they go (because they are poor), but asset / debt heavy baby boomers sure do. So watch interest rates, especially 10-year US Treasuries (TNX). Higher rates will empower the millennials / disenfranchised, and lower rates means the status quo is maintaining – for now. (i.e. because it's coming no matter what.) In this regard, as you may know, we are watching the Gold / USB (30-Year US Treasuries) Ratio for the signal inflation is accelerating higher, which is in fact the case already, but the trend has not shifted into a ‘manic move' just yet. (See Figure 1)

Figure 1
GOLD:USB Monthly Chart

Before we have an acceleration higher here however, again, precious metals will hopefully correct sufficiently to sponsor another sustainable move higher, meaning it would be great to see ‘summer doldrums' set in during the month of August. This would mean the Dow / XAU (Philadelphia Gold and Silver Index) Ratio could correct back up above 200 before hitting the ‘trend definer' (155-month exponential moving average – EMA), setting the stage for a penetration of this important measure in the next impulse lower. This would be the best outcome, setting the stage for a run with the ‘seasonal pattern' (see below for more). (See Figure 2)

Figure 2
INDU:XAU Monthly Chart

Once the correction is over however, if the monthly silver chart below is any indication, it should plow through Fibonacci resonance resistance at 21.50ish with ease to the next such node at $27.50. One should notice the fact it appears the time-lines continue to define the move, meaning a substantial correction might not hit the silver price for a year and a half if the two-year cycle is still in force. If this is the case, I would expect silver to be trading over $100 per ounce by then. Because volatility, as measured by Bollinger Band® Widths, has been coiling for three years and is now structurally positioned to breakout of a descending and contracting triangle. Lookout when that happens. (See Figure 3)

Figure 3
Silver Monthly Chart

The point is, the sooner the correction, the sooner the next sustainable leg higher can commence. If we don't correct soon, then the risk of a ‘seasonal inversion' in September will be increased, meaning prices could remain ‘constrained' right into the winter. Too much too soon is never a good thing – but tell that to central planners stupid enough to think they can keep printing increasing fiat money with no consequences. Eventually all their tricks to hide the inflation are revealed – no matter what. And the same is true for stocks, given any degree of hyperinflation can hide things until people begin to be priced out of existence. Power costs in Toronto Canada are up 25% year-over-year just due to bad management. Imagine how much they still must rise due to cumulative (but thus far hidden) inflation. (See Figure 4)

Figure 4
SPX:VIX Monthly Chart

And we may be reaching that point for stocks now if the sinusoidal in the SPX (S&P 500) / CBOE Volatility Index (VIX) Ratio is in fact the definer of the move. So the while the nominal SPX might still need to rise above 2200 this week to discount the collective Democrat ego, at some point this pig will top, and down it will come. Until that time however, if you look at the positioning of the various indicators shown, an argument can be made the sinusoidal will not contain the move to the upside, which is what one would expect in truly hyperinflationary conditions. Like I said last week, don't short anything with the bonds acting the way they are. The SPX / VIX Ratio could keep rising until RSI hits 70. It's only 58 right now. (See above.)

So be careful you short sellers. Certainly some sort of correction will likely occur around the large round number at 2200 on SPX, especially once month-end window dressing has past, but the question is how big? (5% or only 2%?) Perhaps it's better to avoid the pain until at least September, like in '87, because the rally looks like it can last at least that long. If it starts looking like Hillary will lose and speculators keep getting more bullish – then there could be some real trouble in stocks before November, but we don't know that yet.

Good investing is possible in precious metals.

 

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