The following is commentary that originally appeared at Treasure Chests for the benefit of subscribers on Monday, January 9, 2017.
Why do gold and silver prices top overnight and come into New York cash market down significantly off the highs almost every day? Answer: The futures market that trades 24-hours a day, populated by the big gamblers and hedge funds that have the most profound effect in driving prices of all factors. These people place their bets and takes their chances and all physical market investors are taken along for the ride - good or bad. Unfortunately since 2011 it's been all bad for the most part because the consensus of this group is always bullish, removing any kind of 'worry wall' (think short squeeze) to climb. And the same thing can be said about the ETF and share markets as well. Instead of buying bullion or shares, the gamblers prefer calls on leveraged ETF's or the shares because they think they can 'make more' by doing so, sabotaging both their own outcome and that of conservative long-term investors who must suffer such volatile markets because of these greedy idiots.
And the thing is, this will not change until this negative behavior that's repeated every day changes, which will not happen easily, with collapsing prices likely the only cure. In the meantime, the totality of the buffoonery has turned the precious metal markets into the biggest clusterf*ck of all times, becoming increasingly detached from fundamentals as credit markets were allowed to grow (because precious metals are still traded against as barometers by status quo opportunities), increasingly becoming 'doomsday' in nature. (i.e. because when the next credit contraction arrives it will collapse the economy.) So again, this is why Wall Street machines are able to slap down precious metals overnight and keep them down during the day via ETF gamblers, because the machines grind the greedy bastards up time and time again, as documented on these pages for some 10-years now, beginning back in 2007 when I warned how this phenomenon would tank the broad markets at the time.
But people don't want to hear (and especially not read about it because that's work) about this kind of warning because it doesn't fit with their little self-centered view of the world, so they ignore them. And it's this dynamic that keeps the gambling knuckleheads in precious metal derivatives markets coming back for more, this, and the fact most of the gamblers aren't even exercising their addictions with their own money, but yours, if you are dumb enough to be a voluntary structured money investor of any kind. (i.e. because all markets are tied together these days via derivatives / debt exposures.) And it's this dynamic (stupidity, greed, and laziness) that keep people listening to pod casters who talk 'pie in the sky' about precious metals, and that Chinese goat traders (what's a goat trader?) will be going on the internet some time later this year to buy Bitcoin even though they don't even own a computer.
Technical Note: Is this why it's crashing now, because people are figuring this out? Or because Bitcoin went 1:1 ratio with gold, like the gold target to the Dow? It's the latter of course, signaling gold needs to go up now in order for Bitcoin to rise further. It's simple numerics. Of course it needed a trigger to spark the selling, and it got one. If this is any indication of the mania building in Bitcoin as the Chinese population attempt to flee an increasingly oppressive government, it should go higher - believe it or not - a if it's three times is 'the charm' the next trip through $1,000 should have some staying power. Warning: A break below the round interval at $750 would take away from the bullish case considerably.
This is why I don't do that kind of thing because I don't wish to encourage that kind of thinking, or be included in the precious metals status quo. (i.e. the investors / speculators carried out on stretchers over the years are those who do not think independently.) Case in point, with the above understanding in mind, what should one think with paper gold speculators, which is what these guys are, being the most bullish in a year after the drubbing gold has taken over the past six-months? Is this the definition of insanity or what? So one needs to realize the size of the monster you are dealing with in the precious metals markets, where you not only have the status quo doing everything in its power to keep prices down (think rigged markets, information, etc.), but you also have the precious metals status quo that's attempting to exploit you as well, who will also say just about anything to trick you into signing up for their services - with selling you fake credibility the most common sham.
'Baffle their brains with bullsh*t' is the approach in throwing reams of useless information at you, which in the end has the effect of confusing as opposed to attempting to simplify things. Case in point, again, based on all the empirical evidence available, any idiot can see that aside from countertrend moves sponsored by factors like the dollar($), which is why precious metals are rallying right now, history has proven that until the dumb asses that play in COMEX gold and silver have been sufficiently purged from their speculative positions, prices are going nowhere - evidenced in the latest meltdown in spite of 'bullish fundamentals'. Thing is, if gold was trading on 'fundamentals', it would already be trading thousands of dollars higher than it is today. This fact is unfortunately lost on the vast majority of market participants of course, who are only semiconscious apparently, where until COMEX traders are taken out of the larger pricing formula - prices are going nowhere.
As alluded to in our last commentary, thankfully, this might in fact finally be in the works as the status quo attempts to discredit Trump post the inauguration, where the next time gold and silver are heading higher, Da Boyz won't hold their collective finger on the sell button(s), allowing them to finally come out of the basement again. Combined with the understanding Trump's honeymoon should be burned off by debt ceiling negotiation time in March, although it might take precious metals more time to gain their footing due to deleveraging risk, another topic discussed at length on these pages, eventually they should be in position to make sustainable reversals as 2017 progresses, or 2018 at the latest. Thing is, if this does occur, and in the process COMEX is rendered redundant due to allowing gold and silver to get out of the bag, along with paradigm changes (global decentralization process accelerates, global economies collapse, credit collapses, international payments require gold backing, etc.) - things could change fundamentally in a hurry - we can only hope.
Again however - the key is COMEX must be taken out of the formula - or its just more banker price management in precious metals later on again.
Moving onto the charts now, it's important to note for those who go through the trouble to properly manage risk, that the Dow / XAU Ratio has now traced out a 38.2% retrace from the recent highs last month, which means although a more complex / profound (deeper) correction cannot be discounted, it doesn't need to correct further before making another impulse higher, which it's likely to do for reasons explained below. In stepping back and looking at the monthly plot below, and considering the factors that matter (true sentiment, technicals, etc.), and even fundamentals (which have not mattered for some time thanks to runaway gambling in derivatives and the machines), while further gains here are definitely possible, signaling relative weakness for precious metal shares, at the same time, it should be noted the minimum Fibonacci retrace off the July lows has also now occurred, which could be interpreted as bullish for precious metals under the proper circumstances. (i.e. if it were not for the fact the $ just started correcting lower this week, one would need be quite concerned about this condition.) (See Figure 1)
Technical Note: As can be seen above, although it may prove true no further correction higher is necessary, with Fibonacci resonance related resistance a profound stopper, the totality of the technical picture does in fact still point to higher values, with unfinished business in the MACD at center. This of course means further broad market strength set against precious metals. If both were to start falling as a result of credit contraction and rising $, the result could be quite surprising to precious metals permabulls. Here's hoping for increasing macro hedge fund insolvencies - no?
Moving past this several weeks (month?) out, if it were not for the probability of liquidity concerns, stronger dollar($), and a larger degree corrective affair under way in the gold price (because of the other factors), a bullish posture would certainly be appropriate. Time and price considerations tell us we are not there yet, however the 'bigger picture' could fall into place quickly with a vexing of the $1,000 area for gold in coming months, where a truncated larger degree corrective pattern (see Figure 1) would not be surprising once a preponderance of the conditions / factors for higher prices fall into place. Therein, as the next phase of the larger credit crisis grips the macro at some point, perhaps later this year as the status quo engineers a 'system crash' to discredit Trump, people will start worrying more about return of capital as opposed to return on capital, and precious metals will go bonkers. With over $200 trillion in global debt to be defaulted on globally now, 2017 could mark the beginning of such a panic. (See Figure 2)
In looking at the S&P 500 (SPX) / CBOE Volatility Index (VIX) Ratio as an indication of where we are in terms of the larger process, we can see that it has now reached the highest fan resistance rail, begging the question, is this the rally stopper? Believe it or not, in looking around at the other factors that matter, the answer is likely 'no'. Just look below at the NASDAQ (COMPQ) / NASDAQ Volatility Index (VXN) Ratio as a reflection of this sentiment, where it still needs to surge further in order to reach profound Fibonacci resonance related resistance. What's more, and supporting the view it will get there, we have the open interest put / call ratio (see here) or the PowerShares Trust (QQQ) surging higher as speculators are still willing to take a chance on the short side of tech shares because of Trump's attitude towards the power hungry giants in the sector. As a result, further squeezing is likely as the Commercial Bank liquidity being let out onto the system discussed last week continues to pour in. As a result tech stocks are heading higher, which will take the SPX / VIX Ratio above sinusoidal fan resistance, if only temporarily. (See Figure 3)
So how crazy can tech shares get in coming weeks (months)? Many think stocks will top out right at inauguration time in a few weeks, especially with debt ceiling negotiations approaching, which should be labored. And like the year 2000, this might be true for the Dow (it shouldn't get much past 20,000 before a more profound correction sets in), and more specifically financials, as the smart money heads for the hills. This leaves us with tech to consider again, with continued speculator betting practices in the options markets, along with the debt ceiling negotiation outcome. If Trump is able to pull off a good outcome and speculators remain short tech stocks, which would be evident in open interest put / call ratios (see here), then some variation of a year 2000 outcome is possible, perhaps even 1929 (stocks rise until summer), which could see the NASDAQ (COMPQ) / Dow Ratio run up and challenge the 50% retrace denoted on the monthly plot below. Who knows - maybe it's even exceeded if Trump is able to tame all the swamp creatures in Washington. (See Figure 4)
Of course such a view ignores not only the desire of the status quo to put Trump in his place, but also the ramifications of Trump's policies in an increasingly decentralizing world, which is the 'biggie' moving forward independent of what happens in this regard. Thing is, no matter how successful Trump is in coming years, it simply won't matter because the credit cycle is done, which will make radical change in the global political economy a necessity. And while this understanding is only understood by very few truly objective observers at present, it's not a good idea to be in this group in planning your life and finances moving forward, because not only will radical change be occurring internationally, at home seemingly 'crazy things' will be happening here too, such as sessions, which is a bigger risk than just about anybody thinks possible at the moment. How high do you think interest rates will go if Texas and California decide to go it on their own? Answer: A lot higher than now. And then we have the same concerns in Europe, which look very possible this year with key elections in both France and Germany. Perhaps the big story will not be America this year.
And then there's the debt bogy in a rising rate environment. It's difficult seeing Mr. Trump (and the rest of us) dodging this bullet for long despite the best laid plans.
We won't have to wait long to find out of course, because the SPX closed right on 2280 resistance Friday, where if it's able to break through, the wave structure will be altered triggering a 'buy signal' projecting significantly higher prices. Again, if it's able to surge past 2280, a move to touch the bottom of the long-term growth channel (seen here in Figure 3) is possible if failure does not occur somewhere along the way. Such an outcome would be consistent with the 1928 / 1929 analog, which would become a possibility if Trump gets all the credit he needs at debt ceiling negotiation time in March. So even if a break higher does occur, one would think that prices would back off post the inauguration no matter what is coming in deference to this risk. Of course if the speculators keep shorting tech like they are now, anything is possible with all the money sloshing around out there these days. So needless to say, the price action this week will quite telling.
That said, we know from the charts above (and attached) that tech stocks likely still have some unfinished business on the upside, so in terms of Figure 2, we could have a false break higher as Figure 3 extends up to the Fibonacci target, only to fail intra-month, again, around inauguration time, or possibly as late as early February if we get strong monthly closes as many are expecting this timing, meaning short sellers coming in could extend the sequence. So along this train of thought, naturally we will be watching the post expiry open interest put / call ratios to see if the speculators that play this group are finally broken post options expiry on the 20th, inauguration day. If not, like in precious metals, we may have a bunch of suicidal nut-bars on our hands to deal with, so again, we will be watching. Aside from the structural hedging that goes on in broad market measures, generally these guys are nowhere near as stubborn as precious metals speculators, so one should expect capitulation at some point.
Still however, short sellers should not attempt to front-run such an event, as this would make you as stupid as they are.
And you don't want to be counted in this group.