The Ratchet Effect
The following is an excerpt from commentary that originally appeared at Treasure Chests for the benefit of subscribers on Thursday, September 10th, 2009.
It appears our self-serving bureaucracy thinks they can keep fooling the markets indefinitely, where now they have resorted to attempting to ratchet stocks higher against precious metals. Of course the funny part of it all is as you know from our last meeting precious metals charts are telling us it will take hyperinflation to keep equities moving higher however, as the dollar ($) decline is getting stretched to say the least. Price managers don't want stocks heading lower into October however, for fear of a panic that gets out of control. So, they come in and squeeze the shorts at every opportunity, taking advantage of the seasonal inversion characterizing the trade at the moment. The bad part of this from their perspective now however is the shorts have been squeezed so many times they won't come back for quite some time, which means either price managers buy up all the market, or at some point a correction must take place. What's worse, and as reflected in the $, unless price managers intend to own the entire market, meaning fewer and fewer market participants are buying up here (as reflected in volume data), we are in a blow-off phase right now, with perilous implications for stocks once price supports disappear. And this support will disappear at some point soon, if not now, when seasonal strength is scheduled to come back in the market, as bearish short sellers will surely not wish to wrestle with this demon after being squeezed so vigorously during what was suppose to be seasonal weakness. (i.e. ending in October.)
And for gold, as long as they think the physical market will not be a problem, why not keep papering over it, as the last big short with the exception of their own position has now been removed from play, meaning price managers do not need worry about a large panicked buyer entering the market. What about the Chinese in this respect? Well, the boys in New York think the Chinese are a bunch of unsophisticated idiots for letting them take over their markets as much as they have, so they keep hitting the paper precious metals (and commodities) market with abandon. And the Chinese now know this, which was the message a few weeks back, however they don't mind the cheaper gold, as they can accumulate more. As hypothesized in our last meeting however, this is what could break gold higher, if the Chinese renege on precious metals derivatives contracts they think they were cheated on. Or perhaps it's some credit /debt related derivatives contracts the Chinese renege on that starts an inter-market sequence at a bank, forcing it to cover precious metals contracts its under water on. There's really no way of knowing when / if this sort of thing will happen. The point is however, if one or two of the bank cartel members begin to cover their short positions, a commercial short squeeze could ensue. It's either that or the banks will win this game once again, taking gold back below $1,000 in 'double top' formation, looking to kill it when the dollar ($) finally catches a bid.
So you see the bureaucracy thinks they have it all under control with a self-managing gold containment mechanism built into the market, where all they need to do is cap paper prices as they ratchet stocks higher. And who knows, maybe they actually think people are not noticing what they are up to. This view is wrong of course, witness Greenlight Capital switching $500 million worth of GLD for physical bullion earlier this year, but no matter, so far at least, they are winning, whatever that means. I say this because the longer price managers keep ratcheting stocks higher, increasing numbers of shorts will leave the market and not come back, making the inflation signal that gold is the least of their problems. And you can see this in a properly annotated silver chart, where it appears RSI is vigorously testing a previous diamond break, meaning try as it might, still, silver should consolidated lower one more time. (See Figure 1)
This is not the only bearish chart from the silver sub-sector I can show you either, which does not bode well for the larger precious metals group because it's been leading the rally in many important respects, along with acting as a signal for the larger equity complex. So, if silver were to turn lower here not only in absolute terms, but also in the relative measures its been leading in, equity bulls would be compelled to take notice, as the dreaded Supercycle Degree Wave C down in the larger Grand Supercycle sequence Bob Prechter alludes to in the radio interview from the weekend could get underway anytime now, implicit the broad stock indices could be heading down some 90% plus before it's all over, taking precious metals prices along for the ride. This next chart certainly highlights such a risk, where silver (along with gold because its chart is the same) would likely lose ground against commodities in general, and of course commodities would decline in absolute terms within the context of a deflationary event. (See Figure 2)
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