The following is an excerpt from commentary that originally appeared at Treasure Chests for the benefit of subscribers on Thursday, October 11th, 2007.
Gold is set to move higher over the next few days towards $800 in a blow-off of the larger sequence since summer. This could send some precious metals stocks far higher than may be contemplated by some, where corrections would only take complex components back to current proximities. That being said, while such an assessment may or may not prove correct, one thing is for sure, anybody attempting to time inter-waves within larger sequences could find themselves left 'standing at the station', unable to get back in without paying up. This of course will depend on how quickly the 'cake eaters' (for our Italian friends) decide to debase fiat currencies around the world in preemptive monetary largesse. That is to say if they too (like the day-traders) feel every dip should be bought and send monetary debasement rates soaring with the next round of equity market(s) weakness, corrections may only end up being 'pullbacks', where it will be 'party on dude' for the precious metals sector as a profound message is sent to all witnessing gold crack four digits ($1,000) for the first time in history. This of course will be digital nirvana for all gold bugs, a group that I am happy to be a part of at this time.
As per our concerns with regard to the broad stock market complex expressed yesterday however, it appears price managers are running short of rubes to squeeze in the options market, where for those not actually studying market structure in this regard, they would not know aside from large positions in far out of the money contracts that skew aggregate put / call ratios (they don't matter much in determining price, making aggregate ratios misleading), it appears the bears may finally be exhausted. What does this mean? It means put call ratios in contracts closer to the money have fallen substantially, and that once enough short sellers are squeezed out of the market, stocks could fall considerably before regaining traction. Of course if history is a good guide, once prices begin to fall fresh populations of put buyers normally show up, driving key index related ratios higher again. As mentioned in our last outing however, market participants may hesitate in buying this expensive form of insurance due to the belief supportive Presidential Cycle influences (monetary and fiscal policy) should be enough to give them a pass this time around.
In this respect, whether one is speaking of either index related put / call ratios or those derived from volatility indexes, it should be know that come the December series, as it stands now increasingly little options related support exists for stocks. And again then, if this condition is not rectified, such an outcome could make trouble for all equity groups, even gold, because nominal pricing for the metal of kings is now closely tied to the fate of the stock market via ETF's. This means if general liquidity conditions were to become stressed, over-leveraged stock market participants would be forced to draw on gold due to it's highly liquid nature in meeting margin calls. So you see it was our knowledge of what is happening in the options markets, along with a potential steepening in long to short rate yield curves that was getting us a bit twitchy with respect to just how server the impending correction in the precious metals complex will be. Again however, we are not suggesting long-term investors sell any positions here. We are simply attempting to find you better accumulation points. For those who are trading however, one might want to lighten up on positions (with reference to trading positions in shares and futures) if we get an uncharacteristic blow-off into early next as options related considerations discussed above could put a cap on things, not to mention the widely followed 10 - year to 3 - month yield curve is set to potentially break higher very soon. Here, an initial liquidity shock could knock gold down, as described above. (See Figure 1)
Figure 1
Of course after this initial shock, and as per the spike lows seen in August, the precious metals complex should be back to the races as Christmas approaches, or at least we hope. Here, concern the upcoming correction in stocks could be cyclical in nature (longer-term) stems not just from the fact a significant turn higher in the Rydex Ratio (See Figure 1) is now due with current strength in the equity complex; but more, the Silver / Gold Ratio continues to remain depressed, suggestive semi - educated investors are concerned in this regard. Considering silver is pound for pound the most despised commodity on the planet however, religiously shorted by commercial types (think our price fixing authorities), one should remain open for a surprise in silver. In this respect I particularly like the Coeur D'Alene (CDE:NYSE) (a marginal producer that out-performs in growth sequences) chart right now as a break out is currently in the works with truly informed investors sensing a potential 'commercial signal failure' (a big short squeeze) as hyperinflationary conditions send demand for physical soaring. Here, one should watch COMEX warehouse stocks for an indication trouble is brewing in this regard, not to mention silver market COT structure in monitoring Commercial Trader activity. (See Figure 2)
Figure 2
Source: Sharelynx.com
And that's the message not only with respect to silver, but gold as well. Most investors are clueless with respect to why prospects for inflation, and then in turn rotating asset bubbles have become the norm. And now, it just so happens to be time for both silver and gold to shine on a relative basis, where once Fibonacci resonance related support on the Dow / Gold Ratio is taken out in coming days, the metal of kings should fly up into the four digits trajectory. You see authorities cannot stop printing money at an accelerating basis because the consumer is tapped. Furthermore, if it were not for hedge funds continuing to extend the credit cycle via carry trade and margin debt related borrowing the larger global economy would be toast, with hyperinflationary monetization practices the only recourse once failure becomes evident here as well. In this respect China is not an island either, as when their stock markets top out at some point (who knows when), they will rediscover their frailties as well. Of course such a threat, along with helping to support the Western banking model, is why monetary growth rates remain very accommodative in China too, where charts of precious metals share indexes suggest expansion should continue to be expected. Again then, and as suggested above, I see no reason to doubt precious metals shares, as measured by the Amex Gold Bugs Index (HUI), should continue to bust a move higher in the short-term, possibly putting in a semi-parabolic top early next week to mark the end of a very strong run into seasonal strength. (See Figure 3)
Figure 3
As Dave mentioned yesterday, if the 413 area is breached on a closing basis to the upside, while such an advent may not necessarily alter the preferred count, the fifth wave extension could be something to behold, where a correction may only come back down to the large round number at 400 to test the break out. You see as it becomes more apparent consumers may take a powder this Christmas; authorities will need to boost the wealth effect further, meaning monetary debasement rates will need be accelerated quite soon. This would of course be especially true if stock markets are stressed as we move into December. And this is why key indicator measures on the weekly HUI plot shown below are set to break out of 'gargantuan' diamond structures that will signal a very powerful move is underway. Here, we may get this signal over the next few days if the HUI streaks up to the 450 area for example; again, with a corrective move back down into the proximity of 400 (380ish worst case) to test the break out before the next leg of a developing mania in precious metals shares continues to unfold. (See Figure 4)
Figure 4
In terms of an intermediate term target then, one that could easily be reached by early next year, we do have a measured move (MM) on the HUI / Gold Ratio derived using two structures shown below to work from pointing to a target of approximately .67. So, if our intermediate term target for gold is approximately $1,000 minimally by then, which just so happens to be the case seen here with a Fibonacci resonance related measure (high fidelity) shown on the weekly plot, then the HUI should also be in the proximity of its Fibonacci resonance related projection shown above. (i.e. 620 - 670) Here's the HUI / Gold Ratio picture we are referring to just above. (See Figure 5)
Figure 5
So, anybody tries to tell you this move in precious metals will be over soon, you know what to tell them - bull pucky. And while a correction my be due, you can see from the above it's likely nothing to be concerned about because the powers that be are sensing the need - the need for speed. With respect to the 'big picture' technically for gold, as you can see in the attached study gold is attempting to break above Grand Super Cycle Degree sine related resistance at the moment, where a penetration of the $250 interval at $750 will trigger a trebling in nominal prices, ushering in exponential progression tendencies thereafter.
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On top of this, and in relation to identifying value based opportunities in the energy, base metals, and precious metals sectors, all of which should benefit handsomely as increasing numbers of investors recognize their present investments are not keeping pace with actual inflation, we are currently covering 71 stocks (and growing) within our portfolios. And more recently we have been focusing on the Red Lake gold camp, hosting some very interesting emerging opportunities. In this regard I have just returned from a due diligence trip and will be providing a report to subscribers later this week. This is another good reason to drop by and check us out.
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Good investing all.
