The following is commentary that originally appeared at treasurechests.info for the benefit of subscribers on Tuesday, September 27th, 2011.
A stairway to heaven – or at least financial independence – that’s what investing in precious metals has and can be for those participating, bringing good feelings just as listening to the old standard by Led Zeppelin provides. When one buys gold and silver you are not buying some abstract concept designed to help escape reality however. No, instead one is buying just the opposite. You are buying the reality necessary to protect yourself from fraud and malfeasance that grips mature socio-economic climates such as the one we have today, with all sorts of imaginary money in the form(s) of fiat currency(s), indentures, and share structures. In an effort to extend their power, and because the masses continue to enable due to the desire to delay the day of reckoning, the plutocracy, led by now ancient banking interests at the core (along with bureaucrats and the business elite), continue to manage our present crony socialist system for their own benefit, viewing a gullible and greedy public as an exploitable resource.
What’s worse, and in spite of their greed, it’s important for successful speculators to understand that the numbers participating in precious metals remain at low levels despite the gains made in the sector over the past 10-years, with some important participation rates across the sector presently at historic extremes. That’s right, with gold up some 600% over the past decade the investing public remains largely uninvolved in the precious metals sector for one reason or another, with this being especially true of the shares, which is largely why they have been going sideways over the past year despite gold and silver prices soaring. To this day they remain mired in an approximate 15 % trading range as measured by the Amex Gold Bugs Index (HUI), vacillating between 500 and 600 since October of last year which can be seen on this attached daily plot amongst other things. Presently the HUI is likely on it’s way back down to test 500 again, which should be successful as a sinusoidal pattern with expanding amplitude is tracing out.
And as one can see in the attached above, resistance at 630 is an important Fibonacci resonance related obstacle as well, where once surpassed a buy signal indicating the HUI was on it’s way to 1,000 plus to complete Primary Degree C within the larger Affair would be triggered. We know this to be true from the findings within my harmonics study undertaken back in 2003 projecting the HUI’s growth path to its ultimate completion now looking like this will not occur until 2021.
In focusing on Figure 8 one can see that we are presently in Primary Wave C of the larger Affair higher, with Primary A having topped at 260 in 2003 (instead of 280) and Primary B bottoming at 150 (instead of 161) in 2008 (both misses within tight statistical variances), now on our way to 1050 or thereabouts if the model continues to maintain it's predictive value. I see no reason for the model not to continue working aside from normal statistical variances (5% give or take, meaning the HUI should top out around 1,000 next year, likely around the turn into 2013 if the timing element of the model proves correct.)
Then, if the correction coefficient is maintained, we should witness a bone-jarring retracement into the 500 to 600 area, likely coincident with central monetary authorities pulling back on currency debasement rates post the US election next year. Thus, as per the Presidential Cycle (amongst others), 2013 and 2014 should witness a profound correction (50%), allowing swing traders / investors / whoever to reload for what will likely be shades of hyperinflation running into 2021, again, if the Fibonacci timing element used in my model proves correct. This would put the HUI somewhere between 2000 and 3000 in 2021 depending on the degree of currency debasement, degree of mania finally arriving, etc.
So, although it may not seem likely right at this moment with financial market mayhem now making trouble for precious metals too, if the bullish backdrop that is shaping up for the sector plays out, by this time next year we could be looking back saying ‘what a year’ with the HUI trading over 1,000, as forecast above. Because again, cycle wise (as per harmonics study attached above), 2012 should be a great year for precious metals shares. And continued denial about the state of the economy, currency debasement, and future prospects is another reason they should soar at some point as well, where ignoring the general public as a demand factor (for the same reason) for just a minute, and as pointed out by Eric Sprott at a recent conference I attended, unbelievably, pension funds are still non-participants in the sector and will be forced to buy eventually. It’s either that or their managers will be fired.
But both institutional and individual investors have every right to be concerned about precious metals shares for the reasons listed above, and more, right? In this regard, what about liquidity concerns in what to many appears to be an accelerating deflationary spiral. This, ladies and gentlemen, is how an exploding profit and dividend profile for precious metals producers can be ignored I guess. In any other sector investors would be jumping all over the sharers of companies with such profiles, but one must remember (as per guys like Denis Gartman) gold and silver (never mind the shares) are risky. And of course this would be especially true in a deteriorating liquidity environment.
There’s only one problem with this view however, not only do we not presently have a deflationary environment, general liquidity conditions are no where near as bad as they were in 2008 on either a corporate or individual level as well. So, those expecting a repeat of 2008 are most likely in for a big surprise. And there are a great number of investors with loads of cash on the sidelines expecting a repeat of 2008 here that will be big buyers (at higher prices) once they realize this is the case, with increasing numbers eventually forced to buy precious metals shares (higher too). Further to this, and to prove I am on the right track with my thinking here, you should know that because of this fear, volatility in stocks is even greater than it was in 2008, with the risk adjusted S&P 500 (divided by the CBOE Volatility Index [VIX]) already approaching the same depths witnessed at the final lows in March of 2009. (See Figure 1)
Figure 1
What’s more, and along the same lines, it should be noted that not only is the risk adjusted stock market already back down to the 2009 lows at this time, but also, US long bonds, as measured by measured by either the 10’s or 30’s, are at all time highs, meaning the fear of deflation has never been greater in the history of modern financial markets. (i.e. which includes the 1930’s.) This of course means there is a great deal of capital (hot money) wrongly invested in bonds right now that will need to be reinvested at some point in the not too distant future. So, once we get through the seasonally weak period for equities that can run through to the end of October stocks should rise and bonds will fall, with commodities and precious metals undoubtedly finding their footings as well. And while the commodities themselves might not outperform in the coming year (sequence), their representative stocks should; again, with precious metals stocks leading the way this time around. (See Figure 2)
Figure 2
We know stocks in general (and not commodities) should outperform (commodity prices will still rise, just not as much as their paper proxies) this year based on the message being telegraphed by the Nasdaq (and Nasdaq 100) / Dow Ratio (see above) right now, with tech outperforming against a generally weak overall tape, creating a divergence. In the first place, tech stocks are high beta movers and extremely sensitive to changes in general liquidity conditions, which is why they have been outperforming. The broads and financials have been underperforming because of a wrongheaded read of the situation with sovereign concerns regarding Europe in the news everyday, creating the present opportunity for those who read things correctly. So again, once the market figures out that things are going to be OK in Europe (don’t worry, the ECB won’t let the inflationists down) sometime this fall a great deal of buying will come back into stocks, and precious metals shares will double from current levels.
In fact, if you believe the reaction in stocks, bonds, and commodities (including precious metals) to the rumor the European Financial Stability Fund (EFSF) is to be ‘leveraged up’ at the goading of US authorities, the ‘official bailout’ might already be here, risky and doomed to fail at some point in the not too distant future (think 2013 at the latest) as it might be. Those who have taken the time to study the situation know however that the likelihood of such a plan moving forward is still ‘highly questionable’ given Germany, who is central to a credible and sufficient expansion of the EFSF, may still not be scared enough to approve such a reality this Friday. Too much politics is still up in the air to rate this the ‘slam dunk’ the markets have ascribed over the past 24 hours, so be careful if you have cash to invest on the prospects a tradable low might be in equities (especially precious metals) until the expansion of the EFSF is ratified by Germany. (i.e. so watch the German vote this Friday carefully.)
Once this occurs one should quickly get into position to benefit from a meaningful and lasting advance in equities of all varieties, as again, Germany is central to an expansion of the EFSF, and a TARP like bailout in Europe is central to rounding out an expansionary monetary policy amongst developed Western economies, which is of course key to reinvigorating global consumption and exporting / emerging market economies. And make no mistake about it, Europe holds the key to a sustainable global economic recovery, stock market rally, etc. moving into next year and you can count on the US to continue pushing Germany to back an expansion of the EFSF considering it’s an election year in the States. So, whether it be due to such prodding, or because the Germans finally get scared enough on the own, no matter, as long as a meaningful TARP like program is implemented in Europe some time this fall, next year should prove favorable for the larger Keynesian experiment currently underway.
And again, the charts above are telling you that even if some sort of mini-crash like event still awaits stocks in October in order to produce a double bottom in the SPX / VIX Ratio, we are close to such a bottom at present both in terms of price and time to start speculating on such a turn, which is why we are here today. We are here to make sure you see and benefit from this opportunity in what must appears to be a confusing time to most. To reiterate the key understanding in this regard, the idea here is if the European’s (Germans) vote soon (possible this Friday) to expand money supply growth rates (see pink line), which at last read were close to zero, the global monetary expansion profile would turn decidedly positive (with Western economies all moving firmly into expansion mode), temporarily thwarting deflationary pressures (until 2013) yet one more time. This thinking is confirmed in the following chart of the Dow / TSX Ratio, where as long as more risky Canadian stocks continue to outperform the Dow (still deemed the safest measure of stocks globally), the inflation boggy is correspondingly deemed to still be alive as well. (See Figure 3)
Figure 3
Further to this, you should know that US index open interest put / call ratios for the SPX have been moving decidedly higher ahead of prices since last month’s expiry, which adds to the bullish formula (think short squeeze) as the next expiry approaches. Combine this with the fact every money supply measure in the US still growing strongly, including True Money Supply (TMS), Currency in Circulation, M1, and even M2, and what we have is a recipe for a rally in equities, again, even if both the VIX and dollar ($) need to rally one more time to complete their respect sequences for present intermediate-term moves. That is to say, both look like they could push higher one more time in the short-term; however, the next intermediate to longer-term degree (over the next year into election time in November of 2012) moves look to be in the opposite direction, which is compelling knowledge for position traders at this time.
Complicating things further yet however is the fact that open interest put / call ratios for GLD, SLV, XAU, and the particularly important GDX (because it’s widely played and will be causal / pivotal in any sustainable precious metal stock rally) have all fallen dramatically this cycle (month), meaning unless some put buyers show up soon, squeezing potential running into October 21 will be limited, making the potential for a meaningful rally equally limited, if not maintaining the risk lower prices are still ahead. (i.e. as mentioned above, the HUI could still touch 500 to complete the lower extremes of a forming sinusoidal. And lest we forget the SPX / VIX Ratio could still double bottom next week if the German vote goes the wrong way on Friday, so again, be careful in terms of committing all of your trading capital too quickly. Seeing the vote ratified by the Germans before committing 100% is still advisable even though admittedly intermediate degree bottoms in both gold and silver appear to be in place at this time.
That’s the problem with climbing stairs of course, if one stumbles you might have to give back a few before heading higher. Determination is key here naturally, and you can rest assured our present batch of politician’s (on both sides of the pond) are determined to stay in power, meaning you can count on a great deal of money printing moving forward even if such plans stumble later this week.
And as you undoubtedly already know, if we have money supply growth rates climbing the stairs we will also have equities climbing their own sets of stairs, with precious metal shares leading the way in a stairway to heaven as mania is sure to grip the paper at some point – it always does.
Good investing all.
Captain Hook
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