The following is commentary that originally appeared at treasurechests.info for the benefit of subscribers on Thursday, April 12th, 2012.
Dr. Bernanke is in a pickle. And when Bernanke is in trouble, we're all in trouble.
Why is Bennie in trouble? He is in trouble because he has a debt, or should I say an obligation to Obama for reappointing him Chairman of the Federal Reserve, the Fed. Here's where the problem lies. In order to fulfil this bond of duty, Bennie and his buddies down at the Fed will need to pull off slight of hand tricks that would put the best of magicians to shame. They will need to keep people's attention focused on the left hand while the right continues to do their 'dirty work'. (i.e. print new currency and create inflation at ever-increasing rates.) They will need to print ever-increasing currency because the hollowed out US economy demands it, Presidential election year or not. But of course because this is an election year, and Bennie has this debt to Obama to make the economy appear as good as possible (so he can get re-elected), you can expect the Fed and all their friends in the larger bureaucracy (government, media, etc.) to work overtime creating obfuscation about what they are doing on one hand, while keeping other fingers on the button - the currency printing button. (i.e. think True Money Supply [TMS] growth, unstated Quantitative Easing [QE], and all the other sources of currency printing not accounted for in "conventional money supply measures".)
None of this is new of course, it's just more extreme this time around because we are feeling the effects of long-wave cycles that could be far more profound than most realize, or care to admit. We will have more to say on this subject below once we get into the charts because they will conclusively demonstrate that as a society we are still well embedded in denial about our future prospects, where it's characteristic for the masses to ignore unpleasant realities and the cold harshness of the inevitable. Be that as it may, and maintaining our focus on what we will term more 'near-term influences', in terms of the above, we are referring to the Presidential Cycle naturally, the four-year cycle that revolves around the election occurring later this year in November. Here, it is now widely understood by almost everybody who is involved in the investing game, from institutions to the small speculator, the effects on the economy of Fed largesse in the third and fourth years of this period, with emphasis on the fourth year here today given present circumstances.
What then, is unique about present circumstances, and why is this a pickle for Bernanke? In short, and in borrowing from subject matter already introduced above, Bernanke's problem is embedded in the fact the US (and larger Western) economy is dangerously hollowed out due to the ever-increasing needs of our very mature fiat currency monetary system, implying debasement rates must continue to rise even if this means a parabolic trajectory. This in itself is of course a big enough pickle for Bernanke to deal with all on its own, attempting to hide the increasing currency debasement (inflation) via obfuscation and hand shuffling of sorted varieties. What's more, it's this condition that will likely make it impossible for him to deliver on Obama's debt because in order to not have our hollowed out economy collapse prior to the election he will need to keep increasing currency debasement rates to the point inflation becomes noticeable despite all of the 'official rhetoric' (propaganda) to the opposite, with gasoline prices the number one measure in this regard ever present on voter's minds.
And as you may well know, as it has been the source of considered discussion already of late, no US President has ever been re-elected with gasoline prices rising and making new highs regularly, which places both Mr.'s Bernanke and Obama in one pickle jar, and the rest of us in others. For Obama, unless the Bernanke can get gasoline prices back in the bottle this would likely mean no second term if history is a good guide. And for the rest of us, broadly speaking, such an outcome would mean even higher energy costs in all likelihood because by implication this would infer currency debasement rates continue to accelerate, where we know this must occur in faltering and very mature fiat currency based monetary systems / economies. Again however, even if this occurs don't expect the media or government agencies to paint such a picture, as is the case at present. Expect to see more doctored data and attempts to hide reality and persuade to the opposite, where over the past few months the powers that be (with help from our loved financial institutions) have been tightening the screws on the precious metal stocks pickle jar.
This is because they know speculators believe precious metal shares both lead and outperform in strong moves to the upside in the sector; and if they can be trashed, for whatever reason, even if false, at a minimum this would create the impression (and give the Fed, government, and the mainstream media ammo to aid their collective cause) inflation is well contained. Now I realize this may sound 'out there' to those who choose to ignore the Fed's own propaganda. And to an extent I can sympathize with such a view in knowing wrong headed speculators continue to furnish market conditions that will not allow for rising precious metals prices barring hyperinflation, where some of you may remember my previous discussions on this topic - gambler betting practices in paper precious metals derivatives. At the forefront of understandings in this regard, it must be remembered / recognised that until currency debasement rates trip the light fantastic the 'authorities' will be able to continue exploiting these wrong headed speculators using High Frequency Trading (HFT), algorithms, etc., toppling them over at key times (think expiries, key data releases, etc.) repeatedly, maintaining the illusion inflation must be under control with precious metals shares collapsing.
That's the pickle jar precious metals investors are in at present, all bottled up by the powers that be, but with a great deal of pressure building due to all the inflation, ignored presently as it may be. This will change however, and such change can be very rapid depending on how exhausted hair-brained speculators within the paper based precious metals space become. (Please note the naked shorting of precious metals shares and physical bullion supply issues are factors here too, however at the margin, it will require a change in ETF speculator betting practices to spark a new cyclical bull market phase in the sector.) Given precious metals shares are both oversold and undervalued at present, any such exhaustion should be profound once it arrives. And I can tell WHY this will in fact be the case. This will be the case for the exact opposite reason speculators are buying calls on key paper precious metals representations at present, generally causing put / call ratios in the ETF space to remain well below unity and approaching .5 on the important ones. (i.e. GLD, SLV, and GDX) In this regard it's essential to realize there is generally two calls for every put in this market presently, making the prospect of a short squeeze impossible. And again, this dynamic is the chief mechanism by which the authorities can conduct raids in the sector, like the one just last week at Fed meeting time, proving to all that Da Boyz are still in charge - or so they think.
Let's hope they are enjoying themselves at present because one of these days, likely at an options expiry sometime between now and the election in November, bullish speculators will become exhausted, sending put / call ratios back up through unity across the sector, and they will not come back into this space for considerable time. Why? Because once November is passed they will assume Bernanke's debt to Obama will be discharged whether he is successful or not, and that he will back off currency debasement rates post election as is the custom associated with traditional Presidential Cycle related thinking. This, you see, is the forensic 'why' you can expect a significant rally in the precious metals sector post the election. Is it possible the rally begins earlier? Yes, it's definitely possible for a bottom to occur prior to the election, however the best part of the rally will likely not occur until the bullish speculators are broken, which cannot be expected until closer to election time. To know the odds in this respect, simply keep your eye on the open interest put / call ratios for GLD, SLV, and GDX (GDX has the large open interest) attached above. Once they are back above unity this will signal bullish speculator exhaustion, and precious metals should be able to rally subsequently whether liquidity conditions remain favourable. (i.e. people will panic into increasingly scare precious metals in order to preserve their wealth.)
Remember however, the powers that be are serious about keeping gold and silver under wraps for reasons discussed above, so don't be surprised if they use the stock and bond markets (by altering the algos) to give the impression deflation is the chief worry at convenient times like this past Monday when it was announced the Indian jeweller strike ended, which could have sent precious metals soaring if it were not the fact they were able to contain silver as stock market futures were allowed to slide in justifying such price action. The cabal would of course have us believe Silver is nothing more than an industrial metal, where lower equity prices would imply its demand would be commensurately lower. Silver remains the cabal's whipping boy because it's paper market(s) are small and easy to manipulate. This too will change, as constraints in the physical market will eventually force the issue of true price discovery. It's just a matter of time before silver breaks free of present subversive influences. At some point in the future it will rise no matter what the stock market is doing as increasing numbers attempt to secure their wealth in stable money.
And make no mistake about it, increasing numbers will be looking to secure their wealth in stable money (gold and silver) as our fiat currency based economies continue to mature because eventually the masses will recognize an accelerating loss in the purchasing power of the currency(s) causing them to seek out alternatives to instability. As it stands right now, the masses are still happy to ignore such realities because things are manageable, however once this changes, which could be triggered by anything from rising interest rates to skyrocketing fuel costs, a flood of new interest will develop for precious metals, and a new reality will emerge. This thesis is well supported by the fact the Gold / Dow Ratio (seen below) is still essentially basing in terms of the magnitude of the ultimate move that lies ahead. It's consolidating just above the all-important 233-month exponential moving average (EMA), which for those of you who do not know is the most important Fibonacci number within the array in terms of defining a secular move. Once the testing of this metric is complete, expect a very strong surge up into long-term Fibonacci resonance related resistance, which will of course be taken out one day as well as the masses exit the stock market for the safety and stability of the precious metals market. (See Figure 1)
This is definitely not the case at the moment of course, where investors are still busy bidding up tech stocks like Apple and Priceline into bubble territory, where if there were more participants like back in the tech bubble of 2000, the NASDAQ would be tripping the light fantastic again in aggregate. Our meddling price mangers are doing their best to keep the excitement high in the tech arena however, so don't be surprised if they attempt to run them up again after a short pause here into the summer. The precious metals stocks appear to still be well contained, which means this is the plan. Whether the NASDAQ get through sine resistance in the NASDAQ / Dow Ratio pictured below is quite a different matter however, because although tech stocks have been able to make it back up into mild bubble territory, the likelihood of them taking a stab at extreme bubble territory is not high if history is a good guide. It would be anomalous for any market to return to such extremes so early from a psychological perspective, although it must be remembered the characters we are dealing with today are use to getting their way so nobody should be surprised if they keep on trying. The sad part of such an exercise is precious metals stocks will be ignored until tech stocks are broken and fear of losing capital returns to the stock market. (See Figure 2)
So, since it doesn't look like this will occur until summer or fall, weakness should remain in precious metals for some time yet, although if the XAU / Gold Ratio (see below) were to spike down to all time double bottom low once again one would need to wonder whether or not that was the ultimate low for precious metals shares within the present corrective sequence. Because although the mood in the market is reminiscent of the tech bubble back at millennium's turn (more on this below), we have been in a precious metals bull market for in excess of 10 years now, so one would think this might bring investors back into the market more readily. Of course such assumptions have been quite dangerous up until this point, where it has been a far wiser exercise to watch gambler betting practices (as discussed above) and adjust one's strategy(s) accordingly. Any other approach adopted by traders has been hit or miss, at best. (See Figure 3)
Still, stochastics in the above appear set to hit bottom soon, so not taking the bullish case seriously at present will likely prove faulty thinking in the full measure of time, especially if this next picture has any predictive value. Here, we have the Silver / Pan American Silver (PAAS) Ratio (just one of many examples across the sector right now), which is pushing up against sinusoidal resistance, which is the strongest such barrier within the physical world. Now this does not mean double top matching year 2000 highs is not possible. No no no. What this configuration suggests is such a surge is unlikely, although prices could obviously creep higher along the sinusoidal through time as well. The primary observation here however should not focus on further pressure that could be exerted in the precious metals sector (the metals outperform the stocks during periods of weakness), but instead, investors and speculators alike should focus on the magnitude (degree) of a bottom this suggests is forming right now, a bottom that will be looked back on as being as important as that of 2000. (i.e. this is a monthly chart.) Naturally the big caveat here is let's hope we don't have to wait for another (lesser degree) tech wreck to occur before such a party begins. (See Figure 4)
Because much more weakness in Canadian stocks against the Dow would not be a good thing, where we are literally on the cusp of a deflation signal being thrown off by the TSX (Toronto Stock Exchange) / Dow Ratio. As per above, what this means is if Bennie tries to get too cute here and actually slows currency debasement rates too much in order to attempt a 'fix' on gas prices he could crash our present fiat currency monetary system / economy prematurely, where the XAU / Gold Ratio and Silver / PAAS Ratios would break to new extremes if such a condition was not rectified immediately. In having our wonderful financial authorities pushing precious metals prices down right now as aggressively as they are, what they are doing is attempting to have us believe that inflation is well contained, and a gadget related utopia awaits us all just around the corner. It would be quite a different picture if this ratio were to breakout, which is what I fully expect to happen sometime later next year once the gamblers / speculators are properly structured for such an outcome (both precious metals and broad market participants would be bullishly predisposed after massive short squeezes), and the Bernank actually does slows currency debasement rates as per tradition associated with the Presidential Cycle. (See Figure 5)
In the meantime however, expect the money printing to go on unabated consistent with the Presidential Cycle, along with continued expectations management by the authorities in an attempt to dampen prices at the same time. This means precious metals shares could see additional downside unfortunately, however if we are lucky any such price action could be both short and sharp (as bullish paper market speculators finally become exhausted), and then filed in the history bin. And please make no mistake about it, what you are witnessing in the precious metals sector right now is history in the making, where all the chicanery and price fixing undertaken by the authorities (monetary and alike) will eventually backfire on them given the surreal market and sentiment related extremes they themselves are creating today.
To review the above, while it's true technical conditions in the larger companies and precious metals indexes are not as oversold as in 2008, at the same time, many key measures of value (if such a thing exists) are approaching levels not witnessed since all time bear market lows back in the year 2000. What does this mean? It means that while prices (primarily of precious metals shares) could spike lower in days ahead (HUI to ~ 400), still, buying anytime between now and when the bottom arrives should be considered well placed capital by value investors, investors looking to make outsized capital appreciation in the intermediate to long-term.
So don't get stuck in the wrong pickle jar like Mr.'s Bernanke (and Obama), attempting to do the impossible - and buy well-suited precious metals investments now.
Good investing all.