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The Charts Don't Lie

The following is an excerpt from commentary that originally appeared at Treasure Chests for the benefit of subscribers on Monday, September 19, 2016.


 

The charts don't lie – but one must know how to read them.

No matter who is in the White House next year, if some form of income doesn't arrive for the growing multitudes of downtrodden Americans (jobs, helicopter money, etc), it won't take long to see the result – namely a crashing dollar($) that takes the bond market with it, and then stocks in the aftermath. As pointed out in earlier commentaries, we are seeing this already, where market rates are rising with Trumps improving prospects for getting into the White House. If he actually gets in, then it will be 'Katie bar the door' time in money attempting to get out of inflation sensitive issues' (bank stocks, bonds, etc.), switching over to the inflation trade (precious metals, commodities, etc.) eventually, given all things with bubble dynamics in play will take a big hit initially due to the perception 'carrying costs' (interest rates) are heading higher in meaningful fashion. (See Figure 1)

Figure 1
INDU:CRB Monthly Chart

So it won't matter what the Fed says this week, market rates will trump any games they play. Obviously, with the economy already in the tank thanks to their plundering policies, they will not raise rates this week, not to mention the perception of what this would do to Hillary's chances at winning. So expect both stocks and bonds to get a very temporary lift on Wednesday at announcement time due to this. Again however, such folly will not last long, likely not more than very brief surges as long as Trump's fortunes continue to surge. So it will be interesting to see just how powerful the Clintons really are, because word is the power structure is getting worried. This is why both the Dow / CRB (above) and Dow / XAU (below) Ratios are poised for further gains in the short-term, with the former putting in a standard lagged top off the signal triggered by the latter this year, which is retracing back up itself at present, subject matter covered in our trading notes of late. (See Figure 2)

Figure 2
INDU:XAU Monthly Chart

Again, the Dow / Gold Ratio is in the process of retracing the unprecedented crash it has undergone earlier this year as the 'smart money' is now running back to inflation hedges, led by precious metals, with Trump likely to unleash tsunamis of both panic and inflation all at the same time if elected. In fact, it doesn't even really matter what he does at this point, at least not initially, because the status quo's price managers have people so preconditioned to anticipate future events that have not even begun to happen, that the $ could get pasted post election, which may be part of the reason precious metals are correcting prior to the event as well. Afterward, with stocks and bonds reacting to a Trump win, the $ could rise temporarily (or more – see below). However again, this would not last, followed by some serious selling. And you don't want to be long tech stocks because they don't like rising rates. (See Figure 3)

Figure 3
NASDAQ/INDU Monthly Chart

This too, is why they are blowing off right now, ahead of the election, as you can see above. Because if they don't do it now, it won't happen afterward with interest rates on the rise. In fact, one must wonder just how much longer tech stocks can keep out-performing with Trump picking up stream in the poles, not to mention his tax cut plans (with rates responding), which should bring a bid back into the $. A game of 'chicken' is being played right now, with the big question being 'how long can it last?' Because the US can't afford a higher $ no matter how many jobs are created, as the stock and bond markets will tank – big time. (i.e. because both are a function of the 'cost of money'.) The thing to realize in this regard is unlike Reagan's time; the national debt is $20 trillion, not $2 trillion, where a 1% increase in carrying costs would bankrupt the country. (See Figure 4)

Figure 4
Gold/CRB Monthly Chart

Technical Note: As you can see above, while more upside in the Gold / CRB Ratio is possible, it could just as easily test Fibonacci support again before hand, as it's technically overbought. This could be the tell we should expect a more severe correction in gold moving forward than is presently being contemplated by most. All it would take a sustained $ rally off of the Trump tax cuts to create some excitement in this regard.

That said, this is why one must respect the head and shoulders patterns in all the precious metal indexes right now because heaven knows the gold promoters won't, which is just about everybody else other than myself these days apparently. At a minimum, best case scenario for precious metals shares, is all the weakness will be discounted by election time, however if Trump gets in, and he follows through with policy initiatives being laid down as a platform right now (especially cutting taxes), things could get considerably uglier for precious metals than has been envisioned up until this point. That's why if 195 (the 50% retrace) on the HUI doesn't hold during the corrective process, the signatured correction target, much lower prices could be in store as the people go back to work in America, taxes are cut, interest rates climb, and all the bubbles pop. A preliminary warning something big is up would be if gold breaks below $1300, as discussed here.

Unfortunately, that's the situation in the precious metals sector right now if you step back and look at it objectively. It's the proposed tax cuts by Trump that have changed things. Because if he is successful in getting them passed, the New York promoters will herald this as a return to Reaganomics (it's already happening), which if you will remember was bad for gold, even though as pointed out above, the backdrop is quite different today with the national debt (all debt) some ten-times greater than back then. So attempting to return to the 'real world' for America would not work without popping all the bubbles, because rising rates to offset credit risk would eat up any of the benefits of a stronger economy. This is why the Fed talks out both sides of its mouth. On the one hand they want you to believe the economy is strong and getting stronger on a permanent basis because that narrative fits with rising prices; but on the other, it's not quite Goldilocks, so negative interest rates may be necessary.

For the rest of the story, please visit us at Treasure Chests.

Because good investing is possible in precious metals.

 

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