Smoke and Mirrors Markets to Sponsor Precious Metals Mania
The following is commentary that originally appeared at Treasure Chests for the benefit of subscribers on Tuesday, March 23rd, 2010.
At the risk of getting what may appear to be even more bizarre in my current views on how the various markets we cover are about to unfold, in our current view moving forward (our intermediate to long-term view), which has changed (in the intermediate term) for reasons that will be discussed below, gold is preparing to make a move to new highs at the expense of bonds, and stocks will also continue to benefit from liquidity escaping debt markets in spite of rising interest rates. And while the bureaucracy (government, media, etc.) will bill this as recovery in the economy, with equities and interest rates rising in unison, it would of course be just the opposite, the result of hyperinflationary policy that tripled the US monetary base since the onset of the sub-prime (credit) crisis. The idea here is as confidence in the bureaucracy's ability to contain it's exploding deficit spending erodes, increasingly, money will come out of the bond bubble (ranging from corporate to sovereign debt) soon, unleashing this inflation into the economy and markets, pushing prices higher across the gambit. Here's one guy who gets it, and appears to be on the right page right now. (i.e. severe inflation dead ahead.)
Surprisingly however, there are not a lot of people not on this page, which should harden the resolve of contrarians. Instead, they are on the deflation page, which is where we were up until last week when we witnessed the psychopathic resolve these people were exhibiting despite being proven wrong for some time now. What the deflationists are thinking is they will be proven right if they wait long enough, which is in fact correct. However because the extremes involved here are of Grand Super-Cycle Degree proportions, what will happen is their timing could be wrong for a considerable margin, potentially up to a year. (i.e. we could have a hyperinflationary sequence enabled by wrong-headed speculators [deflationists] over the next year.) The potential for an extended inflationary cycle running into next year is well covered here. It would be sponsored by the inflation dynamic (money coming out of bonds) coupled with bearish stock market speculators maintaining the perpetual short squeeze currently underpinning prices. What's more, if this sequence were to extend past April, it would be the longest uninterrupted post bubble bounce in the history of the US Empire era, validating the present sequence is of Grand Super-Cycle Degree.
What could cause such a sequence? It's the degree of the bad news. The news, and within it, prospects for the future, is just so bad, and potential prospects so dire, that as explained last week, people (speculators) simply find themselves compelled to buy puts in an effort to protect their futures, with their psychologies understandably being quite negative. And truly the news is 'that bad', which in turn fuels the put buying, which then leads to a continued short squeeze in equities as the liquidity that was showered on a collapsing Ponzi Scheme (our fiat currency economy) that is now our economy last year finds its way out into the light of day.
So don't be fooled when you hear increasingly bad news, as it will not matter when it comes to prospects for the stock market if people continue to buy puts. As an example, it appears Obama's health care bill will fly, which of course is bad for the economy because it will further empower the socialists, reducing the efficiency of the economy by misdirected spending and increased taxation. This is what somebody schooled in classical economics has been taught to believe. And if this somebody is a straightforward thinking portfolio manager not schooled in bubble economics he / she might be tempted to speculate hedge in some puts to protect the portfolio from what will surely be the deflationary effects of such misguided policy.
And this must be especially true with growth rates in the M's all contracting now, right? Again, and why this impending manic move higher in equities could resemble the craziness witnessed in the tech wreck a la the year 2000, is like then, where Greenspan panicked due to all the Y2K worry and printed way too much money, in the final analysis it will go down that the lax monetization policy provided by the Fed (swapping worthless junk for T-Bills and Treasuries) last year, and all the other years to a lesser degree for that matter (the bond bubble is huge), can provide a tremendous surge in liquidity despite sagging growth rates in the M's, especially if confidence in the bureaucracy, economy, and currency are waning, causing the desire to sell bonds to rise. And rising rates must mean stocks are going to crash with the consumer on the ropes right? So, this is another reason to buy puts right? And the exploding deficits are yet another reason to buy puts right? As a matter of fact, for the bears, this backdrop makes just about every piece of news about the economy another reason to speculate in puts, and market timers can find historical / mathematical / sentiment related reasons on infinitum to buy more puts, so don't forget about this dynamic.
Just to be perfectly clear then, what we are saying here is because of previous, present, and future inflationary policy, where it could be argued last year's bailout of the banks and financial system was a hyperinflation episode, the wheels are about to come off the bond market (see Figure 2), which in addition to the reasons discussed above, is evidenced in a now flattening yield curve. And it's the liquidity coming out of bonds that will fuel a bubble in the relatively tiny precious metals markets, with silver in the lead believe it or not. Historically silver outperforms when the stock market and economy are perceived to be 'good' as it was branded an industrial metal long ago by high powered banking interests. So while the stock market may not be good at preset, it is outperforming gold, which is why it's silver should lead the precious metals complex higher here, eventually shedding its industrial metal association in favor of its longer-term history as a monetary metal. This is when silver will really shine. That being said, in the meantime stocks will need to be perceived going higher for silver to outperform. So it's a good thing the news is so bad out there speculators / hedgers still feel compelled to buy puts in increasing quantities, which will continue the perpetual short squeeze in stocks moving forward. (See Figure 1)
Source: Schaeffer Research
For new subscribers, this is how one can be sure a bid will remain under equities, with open interest put / call ratios on the US indexes the most reliable sentiment measure in the market today. It's the fact the utility of this indicator is not widely appreciated by the market that allows it to forecast movements in stocks so well. Right now, as per our remarks above, with the ratio for the SPX options series (on the S&P 500) back at the highs of the past two years, you can count on a bid remaining underneath the broad measures of stocks until this condition changes, which won't hurt prospects for silver any. This is what will fuel the out-performance discussed above until silver begins to outperform due to its presently unappreciated merits as a monetary metal. Just wait until central banks begin attempting to accumulate gold aggressively to replenish their reserves (as they won't be able to conduct international trade without it at some point), this is when silver will push into triple digits in the future. Figure 1 is the open interest put / call ratio as of the close last Friday, so expiry related changes would likely occur. This is why I will post updated charts on Thursday and comment on how the markets / ratios are progressing into next month. As you can see by the weekly chart below, silver is on what has previously proven to be a topping timeline interval, which is a significant negative to go along with bearish seasonals. (i.e. if silver bucks this timeline trend however, this would mark a bullish acceleration point.) (See Figure 2)
What's more, with both Comex options expiry and the CFTC meeting this Thursday, normally I would say don't expect much for precious metals from this week. As you may know, with a disproportionate number of calls to pay at the $1100 strike for gold, this will have the effect of holding prices back, which will weigh on silver too. And then on Thursday JP Morgan and DaBoyz will get the green light from the bureaucracy to keep selling futures in maintaining the suppression mechanism on paper precious metals pricing. This is how the bureaucracy's price managers have kept a lid on gold and silver prices all these years, by illegally naked shorting the metals via the futures market. So it will be instructive if gold can close above $1130 and silver $17.50 this week in spite of these impediments. Such an outcome would signal trouble for the banking cartel as this would mean not only did they have to pay the options holders, but more, the influence of paper pricing mechanisms that have effectively held prices back previously is dissipating. Why could this happen now? Because of unusual strength in the larger equity complex, where the broad market gamblers are caught in another short squeeze that carries over to precious metals; again, led by silver as it responds to strength in equities. So, watch for a breakout in the Silver / Gold Ratio moving forward, which as you can see below is long overdue by some measures. (See Figure 3)
And again, this is where all the liquidity coming out of the bond market is finally going to catch these buggers (our price managing and self-serving bureaucracy), where in ironic fashion, they will not be able to handle their own insanity, which is the creation of the mother of all bubbles in the bond market. In terms of profound leading indicators the fun is about to begin then, all we need to see is silver break above Fibonacci related indicated below and a manic move higher should ensue, with money fleeing a failing sovereign bond market on an increasing basis. So you see, what will happen here is the mania that has been built up in bonds, which topped last year, will effectively get transferred to precious metals as the smart money looks to secure conservative money in the safest asset group possible, which in an inflationary environment, is precious metals. And then positive price action will beget more of the same as loose headed speculators enter the game, which will come in the later stages of the move evidenced by unbelievable moves higher in unproven explorers and the likes. (See Figure 4)
So watch for a break above 1170 in the SPX, as a lasting break above this threshold should send the bond market reeling, with a great deal of liquidity looking for a new home. And while initially this liquidity may gravitate towards utilities, dividend paying stocks, and corporate issues, over time, with the precious metals markets so small, just residual amounts of new capital entering the market will have a material impact on prices, which will lead to increasing money flows later on as speculation grows, and the precious metals mania matures.
Good investing all.