Appearances Can Be Deceiving
The following is an excerpt from commentary that originally appeared at Treasure Chests for the benefit of subscribers on Tuesday, May 5th, 2009.
The old adage 'appearances can be deceiving' can apply to many different situations, but for today, in our financial mania centric world, there is likely no better use of the term than as it applies to the various markets that characterize the landscape these days. In this respect, right now stocks appear to be discounting better times ahead with their more recent rebound, however even those who do not understand the real reasons why, know this to be a falsehood. They know present strength in stocks is not discounting better times ahead, but instead is a technical countertrend rally, of the cyclical variety. Moreover, anyone who really understands the situation also knows that despite the likelihood the rate at which the economy will continue to contract is slowing, the point is it will continue to slow, not cease contracting and turn back up, which is what the stock market is attempting to suggest. And of course the profound irony associated with this belief is even if it were true stocks are still overvalued in spite of this, which in and of itself would lead to lower prices through time as natural process (the bubbles) continues to unwind.
And then there is gold, and the precious metals complex, that has been held back for decades in understanding the true depths of the situation. Here, in not being able to alert investors to the true depths of problems in the economy, gold continues to be unable to gain its proper footing despite an increasingly favorable backdrop. Of course those who understand gold is a political metal know why this is the case. They know that the faulty and fraudulent pricing mechanisms enable price management of gold (and silver), where speculation and sentiment drive prices as opposed to fundamentals. Add in a little false pretense into the formula supported by a complicit propaganda machine, and in the case of gold, for anyone who is tuned into all this, it becomes easily apparent appearances are indeed deceiving, where once fundamentals are truly reflected in the market, which should occur at some point in spite of all the shenanigans, prices will move much higher. Heaven knows many charts across the precious metals sector support the possibility of higher prices even though liquidity and sentiment related factors might not be cooperative in the near term.
There's the rub you see, where as you should know from recent commentary on the subject, sentiment is far too optimistic on prospects for precious metals shares at present, which applied to our comments above, means our faulty and fraudulent pricing mechanisms will keep prices across the sector subdued. To expand on this subject once again, what happens is because too many precious metals investors buy paper market speculations in the form of both stocks and contracts on the commodities, and not the physical metals, once too many speculators get long this paper, market constraints and human nature take over. All the price managers (central banks) need to do is apply a little strategically placed pressure to the market at the right time, and prices roll over as speculators dump their positions in attempting to preserve capital, which in turn trashes prices. This is of course why the market action in precious metals appears to make no sense much of the time, keeping participants off center, which also aids in price management dynamics because the markets are impossible to predict for most, and are notoriously volatile.
This is why we keep such a close eye on sentiment in the group, watching everything from Market Vane readings (72% Bullish Consensus) and premiums paid on popular paper bullion alternatives (all high at the moment), to put / call ratios on precious metals indexes and ETF's as lead indictors, outlined above. And because most investors are not really investors today, but speculators, this will remain our approach in attempting to divine future price movements in the sector because given the above understanding, keeping an eye on sentiment is the only way of knowing which way prices are set to move in our faulty and fraudulent markets. Here, like now, we must be wary of a trade that is of the opinion prospects for higher inflation will translate into rising precious metals prices, which is why so many will unwittingly run out and speculate in a bunch of call options, unaware they guarantee themselves a disappointing outcome over 90% of the time by playing with leveraged paper alternatives as opposed to buying the real McCoy. Again, this is what our price managing bureaucracy is counting on to aid them in maintaining a lid on pricing because they know it will not be difficult to induce sentiment related selling as options expiries in either bullion or share markets approach.
And this is exactly what should be expected to occur as options expiry approaches on May 15th with open interest put / call ratios (see Figures 10 & 11) on the precious metals indexes falling right now. Given, yesterday's rallies across the complex looked impressive, however one does need to keep in mind the broads are on an apparent tear, and that all boats are rising right now with the extra liquidity this creates. In coming back down to earth one should realize that although the move(s) higher in the equity complex could have much further to go (think seasonal inversion), the risk associated with such a frenzied move, a move more frenzied than any other meaningful comparison in history, increases exponentially as prices rise into such a backdrop. Naturally that's not what the gamers are talking about at present. They are talking about inflation, and the possibility of hyperinflation, which again, has loose-minded speculators accumulating call options on the paper proxies across the sector like there is no tomorrow. And anyone who has ever read a book on technical analysis is looking at gold right now can't help but come to the conclusion the set-up is bullish, as can be seen here in this attached video, which is undoubtedly adding to the call buying. Of course when one steps back and looks at the stochastics / indicators on the monthly gold chart pictured below it's difficult being this bullish about the present sep-up in my opinion. I would be happier to see what appears to be the Cycle Degree B wave take a second leg down, allowing stochastics / indicators to better position for an upturn. (See Figure 1)
Now, once options expire next Friday, if something 'weird and wonderful' (a big rally) is going to happen in the precious metal sector I would set my sights on this timing window all things known (low put / call ratios will not hold prices back post expiry), where more consolidation should occur between now and then as long as a rising tide from the broads doesn't keep prices moving / grinding higher. In my opinion if prices do move higher over the next few weeks this might prove unfortunate with precious metal index charts sporting bullish predispositions (unlike that of gold), where instead of being able to release to the upside post expiry, much, if not all of their positive energy available near-term, is expended prematurely. What's more, this could also involve damaging call buying in the various June contracts available across the sector, which would push more profound bullish prospects further out yet again. You see, given the fundamental backdrop for precious metals, the bulls should not be setting their sights on a move higher that is bounded by the red b (Primary Degree) denoted in the monthly Amex Gold Bugs Index (HUI) chart below. No, no, no. This would involve a channel recapture failure involving a move back down into the vicinity of bull defining support in tracing out a more complex Cycle Degree B wave to go along with that of gold. No, instead, a far more bullish outcome would be characterized by the HUI regaining it's growth channel and not having to look back, which as you can see below, would involve a move to 800-plus in vexing the channel top. (See Figure 2)
Frankly, I would be surprised if the more bullish outcome prevails given a speculator proclivity to accumulate calls at the moment, however stranger things have happened, I'm sure. What's more, to be sure technicals on both the monthly HUI (above) and weekly Philadelphia Gold And Silver Index (XAU) plot pictured below appear promising. In the case of the monthly HUI, it should be recognized that whether before options expiry or not, a move to the denoted minimal resistances now appears in the cards with the MACD cross-over that was triggered as a result of yesterday's gains. And again, if things are to become 'weird and wonderful' post expiry, who knows, maybe megaphone resistance denoted on RSI above, and diamond test resistance shown below are exceeded, opening the possibility of some rather spectacular gains across the precious metals sector. Here, I would expect gold to pay deference to the shares and bust a move over $1,000 in spite of its less than inspiring chart at the moment. In this respect one would do well to remember that gold has been held back since the 80's due to central bank shenanigans, meaning chart related technicals are not a true representation of the internal compression within the formula. Gold is an accident waiting to happen in this regard, where when the price managers finally make a mistake they cannot not paper over, panic will enter the collective consciousness for real, and the price will be revalued much higher, much much higher - manufactured technicals not withstanding. (See Figure 3)
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