The following is commentary that originally appeared at Treasure Chests for the benefit of subscribers on Monday, September 5, 2016.
The thing a good Keynesian will never tell you is once unfretted money printing starts you can never have enough because of what it does to the human condition – it turns people into the pathetic and materialistic sellouts you see everywhere today – what some 'old-thinker Italian people' like to call 'mangia-cake' – or cake eaters. Others in our society more commonly refer to such people as 'good time Charlie's', people who prefer the 'lighter side of life', often with little regard for the cost. No matter how you call it however, the idea here is these are people who like to receive 'free stuff', even if it's stolen from others. And this is of course why the fascists of today are doing so well, because they steal from the public and give back to the mob a few crumbs under the guise of 'social planning', which when put to the light of truth looks like a bad episode of Orwell's Animal Farm.
Thing about it is, once people have something they feel loss if they lose it, so they fight like hell to keep things they like – especially free money. And as alluded to above, bankers, politicians, and oligarchs are amongst the most desperate in this regard, which is why they will do anything, and have their dogs do despicable acts (like war), to keep the free money party going. And make no mistake; money for these types is in fact free now. (i.e. ZIRP, NIRP, etc.) If the public wants to borrow money, they must still pay premiums to the ruling class (the characters mentioned above), however if you roll in the 'right circles', the money is free and it's unlimited – or is it? If this is true, why then does the money printing need to be sterilized? Why does the Fed pay the commercial banks for keeping their reserves on deposit when they could theoretically make more by lending it out to the public?
The answer to this question is found in the money multipliers. If the banks allow the public access to all that money, they will spend it, and then the money multipliers will turn positive, and then prices will start rising, and accelerating inflation would take hold. And this would be bad for the economy in a world with increasingly infinite resources, which is why the powers that be are being so sticky about letting any of this money out to the public. No, they would rather issue unlimited currency to themselves, buy up everything, and put everybody else on welfare because the 'capital markets' will be preserved in the absence of accelerating inflation, which of course could lead to some degree of hyperinflation under the right circumstances – circumstances involving out of control cake eating bureaucrats who don't understand what's really going on.
Enter the growing chorus (see here, here, and here) of just such people into the game now, where because economies are stalling all over the world, something needs to be done right? And since money printing has worked so well for the ruling classes, it makes perfect sense that by giving a little to the plebs, things should work out swimmingly here as well – right? This is of course why we have increasing calls for helicopter money and QE for the people, because the more loose minded (cake eating) members of the ruling classes are getting desperate to hold onto their power, and are will take a chance. In this regard, if the monthly chart of the Dow / CRB Ratio below has any predictive value, while stocks may still have further to go on the upside with Hillary still in the race for the White House, still, profound Fibonacci resonance related resistance is approaching, where a reversal lower would be an 'inflation signal'. (See Figure 1)
So you see, whether it be under Hillary's or Trumps watch in coming years (although it's difficult seeing Hillary making much beyond the election given her health), it won't matter, the people will rebel if they are excluded from the free money party much longer, meaning some version / combination of conventional QE, QE for the people, or helicopter money is on its way. That's what the party in precious metals has been telling us all year now, given a correction is presently in the works, evidenced in the turn higher in stocks to precious metal ratios, with a monthly plot of the Dow / XAU Ratio shown below. As you can see the rally last week has held the ratio below the large round number at 200 so far, but don't be fooled by that, as it's still most likely on its way to a 38.2% retracement when the dollar($) turns back up. (See Figure 2)
Why would the $ turn higher with the economy in the States looking like it's ready to roll over? Doesn't this mean currency debasement rates would accelerate under such conditions, sending the $ lower? Yes, that's true – but that's true for everybody, which would not necessarily affect the $ adversely. No, the thing to keep your eye on is the US election. As discussed previously, if it becomes apparent Hillary won't make it through the election, all that status quo money that being used to prop stocks will want to come out all at the same time because of the uncertainty associated with not knowing what Trump will do if he wins – and the stock market would have a problem in October. This would send the $ higher and precious metals lower temporarily – at least until they see that Trump's plans would be no worse than the status quo's as far as money printing goes. (i.e. because it would take a great deal of money printing to fulfill all his promises.) (See Figure 3)
Just to be clear then, what we see happening in the coming weeks and months is this: 1) Precious metals enjoying buoyancy until options expiry on the 16th at the outside, and then another round of more intense selling due to a $ rally associated with general equity weakness as a result of status quo players abandoning stocks as soon as it becomes accepted Hillary's White House chances are a joke short of completely rigged ballots. That is to say, they would be rigged anyway, but Trump would still win due to a landslide; 2) October could be one of the worst month's in stock market history, rivaling 1987, which is the only way precious metals would decline given the backdrop, because of panic associated with liquidity conditions and deleveraging. (i.e. margin debt is close to the highs.) So bottom line, while nobody knows the future, if the last two weeks of September and October are as bad as possible, an unexpected outcome in precious metals could be the result.
To counter this thinking then, and to give you an alternate (but less likely) view, if the correction in precious metals continues unabated into mid September, this would likely mark the end of the move, creating a very attractive buying opportunity. Again however, if on the other hand, precious metals (especially the shares) rally into mid-month (think options expiry on the 16th), then the bottom in the correction will likely not be seen until next month – seasonal strength patterns be damned. And it just so happens open interest put / call ratios (true sentiment) partially support this view, with the ratios for NUGT, JNUG, GLDX and others (see here) allowing for robust bounces into expiry, given if the ratio for GDX (in particular because its so big) doesn't rise with prices (why would it if precious metals are a 'no-brainer' and hedgers are exhausted), then any strength running into the 16th should be muted.
Further supporting a still cautionary view on expected outcomes for precious metal shares moving forward, we have the fact precious metal indexes put in monthly outside down reversals in August (see Figure 3 above), heavily bolstering the propensity for further weakness at some point in September, at a minimum. Again, it's the same story. To an extent, liquidity is everything in financial markets. So, no matter the 'fundamentals', once the hedge funds start selling uncontrollably, nothing, I mean nothing, will survive such an on slot. Everything would be affected, where the margin clerks would force those off side to literally throw the baby out of the kitchen window with the bathwater. Thing is, hedge funds have never been more long silver. They are at a record in spite of open interest backing off some 35,000 contracts over the past month or so. So the set-up for an unscheduled liquidation by these idiots has also never been higher correspondingly.
I cannot stress the above understanding enough given the present set-up. Never has there ever been such a set-up – so be careful. If you think the status quo boys and girls are infallible you're not thinking, not to mention they will keep pushing right to the end. Therein, if stocks / precious metal shares remain firm into options expiry mid-month and things keep getting worse for Hillary, like she stops making public appearances completely, assume the worst. And again, while core positions are mandatory of course, don't assume precious metal shares would survive a market wide panic with margin debt levels where they are.
While such concerns might obviously prove unfounded in the end, again, there's never been a set-up like this one, so just be aware.
See you next time.