Of Man and Nature
The following is commentary that originally appeared at Treasure Chests for the benefit of subscribers on Tuesday, May 4th, 2010.
More than the perception increasing sovereign bailouts in a worsening economy around the world will bolster precious metals moving forward, countries that are still paying their bills will need to have greater percentages of gold in reserve in order to maintain any semblance of currency stability in what might escalate into quasi-hyperinflation despite what faulty money supply measures will have the consensus believe. This is why gold is rising in the collective faces of the deflationists, and why it will continue to confound such views. It's because the gold is gone and in short supply in a world that will need it to facilitate currency stability and trade increasingly; this, as confidence in governments and bureaucracies around the world are called into question.
An actual breakup of Goldman Sachs (GS) would hasten process in this regard, because not only of the perception US market-making abilities will be harmed; but more, because market rigging will be far more difficult, which could spark a run on physical precious metals. And this risk would be heightened considerably if talk of the Justice Department (DOJ) going after JP Morgan, the other central market rigger in the US, for it's concentrated short position in the silver market proves to be more than a ploy, which could double prices overnight under the right conditions. Jim Richards, who understands the workings of the bureaucracy well due to his experiences throughout the years, is keeping tabs on process here as it unfolds, which one can monitor if you are on Twitter.
Of course the thing that is most significant in my mind about all this is we finally have the circumstance set to push the Dow / Gold Ratio down away from double digits at 10 towards the next significant interval at 5, halving the measure yet again. And as alluded to a few weeks back, this process should get underway in earnest once the S&P 500 (SPX) / Gold Ratio finally breaks below unity, which you can take as a 'buy signal' the move to 5 in the Dow / Gold Ratio has been triggered. Now this may be all technical stuff to you, but for me, who has watch numerous instances throughout the last couple of years that were sufficient in my mind to accomplish such a feat, to finally see things get rolling in this regard - such considerations are paramount in my mind right now even though this subject matter might not be as interesting, or comical, as watching Lloyd Blankfein putting his foot in mouth yet again. (i.e. he is most famous for saying GS is 'doing God's work' last year attempting to justify the excessive bonuses they were able to pay themselves after defrauding their own client base unquestioned at the time.)
Anywho, the above was an optimist's view of things moving forward. And now for something completely different - how about a good dose of reality and a look at how things could go very wrong. How could they go wrong? Well, for starters, yesterday precious metals shares were down against rising commodity prices, which could turn out to be the start of a more profound correction in concert with the broader measures of equities. In this regard, there is a diamond in the daily SPX chart, which should break to the downside if history is a good guide. (i.e. diamonds at the top or bottom of a range are reversal patterns.) If this occurs, then the bearish engulfing weekly pattern (an outside down week closing below the trading range of the previous week) will be confirmed, and a potential intermediate degree correction would be signaled, at a minimum.
And again, if gold cannot 'keep on trucking' higher this week despite any weakness in stocks, this would be troubling, especially if it were to make a b-line for $1100 before vexing $1200. Now I may just be a worrywart, however there are no long-term bond auctions this week, meaning gold should be doing well. The fact it's not, and that the shares are leading lower opens the door to a potential reversal week here too, which would be disturbing to say the least given May is usually a strong month for precious metals. What's more, if gold and silver were to reverse lower this week after the leak the DOJ is finally going to address JP Morgan's concentrated short position in silver that the Fed (and rest of the bureaucracy) have been using to suppress precious, conspiracy theory thinkers could conclude this news was planned as justification for falling prices would be provided by a weaker macro environment.
Be this as it may, with open interest for paper gold approaching a record, one must take this risk seriously, especially considering both precious metal and related equity indexes are on a potentially significant time-line turn, as can be seen above in Figure 1 on the monthly Amex Gold Bugs Index (HUI) plot from the Chart Room. Now with US index open interest put / call ratios supportive of continued buoyancy in stocks moving into options expiry on May 21 any weakness over the next few days could definitely be a head fake, however another bad weekly close in the broads accompanied by precious metals would definitely make it difficult to be bold on such a possibility afterwards, and only as options expiry got much closer. A look at the weekly Philadelphia Gold and Silver Index (XAU) plot from the Chart Room confirms care should be taken as well with a potential channel recapture failure at hand. (See Figure 2)
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