Down The Rabbit Hole
My father was a great guy. One of the most useful things he ever taught me centered on a catch phrase. It was "staying ahead of the game pays off." You've probably heard this before. Perhaps your father would say this to you as well. When you look back at things like this it gives one a warm feeling. And no doubt it's a great lesson in life - essentially espousing the message - be prepared. If we could only do this in more of our endeavors, our lives would undoubtedly be better.
Along these lines, and undoubtedly close to your heart if you are reading these pages, if there is one thing this truism applies to that is of the greatest importance if one is involved, it's the speculation game, that's for sure, where being behind the curve or uneducated in matters concerning a market of interest can be very expensive - very expensive indeed. Fortunes can be won and lost in the speculation game, where simple logic tells us staying ahead of the game is essential for success. The few cannot pay the many. This is self-evident.
Obviously being both wise and clever go hand in hand in order to be successful as well, where the wary speculator must be able to read change fast, adapt, bob and weave. Today, the markets pose daunting challenges for speculators primarily due to the mature fiat currency monetary system that frames the global economy, where we have entered the terminal stages of the progression curve. Here, we now live in a state of financial repression put upon us by a bloated bureaucracy attempting to preserve the status quo, which is quickly turning the middle class into surfs.
This is of course the incentive to both be a speculator, and in doing so, be successful. Because nobody wants to become a surf, which is a risk all the way up the line if a severe hyperinflation were to grip the macro. As the Fed and Western alliance attempt to maintain the banks and fiat currency system such an outcome becomes an ever-increasing possibility, where Q-Eternity (the new perpetual and unlimited Quantitative Easing QE policy announced by the Fed last month) could be seen as the precursor tooling in order to meet the accelerating demands of our collapsing economy(s). (i.e. QE does not work because of diminishing returns.)
The Austrian's (think Austrian Economics) are undoubtedly correct on this point. And if that's not bad enough, that being our present fiat currency economy is crumbling, the average Joe must also deal with cronyism being practiced by the banking cartel, meaning the apparent largesse being provided to the system is largely being hoarded by the banks and their buddies. So you see it's the bank's themselves that are allowing money multipliers to collapse because they would need to drastically reduce lending standards to reverse this trend, where increasing amounts of such lent money would not get paid back either.
What's more, and what is becoming more obvious to new audiences all the time now, it's understood by these characters that if more currency were allowed to trickle down to the general populous, (commodity) prices would be even higher. Still however, this leaves the little guy facing painfully higher prices while incomes are increasingly stagnating from these same rising prices, mal-investment, and any other vulgarity you would care to mention associated with the farce of an economy we have today.
And so this is where we go down the rabbit hole, attempting to answer the question of when central authorities will make more of their printed money available to the little guy. Because right now only those at the top of the food chain actually benefit from QE, leaving the rest of society to pay the tab via higher prices. Incomes are being outstripped by faster prices rising that continue to eat away at consumers, investors (accounting for lower volumes), and etc. until the economy finally collapses onto its own weight. This is what will cause the stock market to crash into super-cycle lows expected in 2014. (i.e. possibly a Grand Super Cycle Low.)
So when will central planners allow liquidity to actually hit the population, even though significantly rising prices may result? Answer: When they have no other choice, which will be after the super-cycle stock market crash into the 2014 lows. This is when they will be desperate enough not to care about general price levels, not too mention commodities should get smacked down hard if stocks slide significantly into this time period. And while it could be argued that this process has already begun, it should be remembered present conditions are likely only temporary.
No, in order to rekindle money supply growth at a major cyclical bottom like the one we are looking for in 2014 it will take more than a few new mortgages in an impaired real estate market to get things rolling again. It would require a check in every mailbox (new and bigger monetization / stimulus programs), which is a 'sure thing' if the Fed's past behavior is a good guide. Don't be surprised if you see the Fed start monetizing just about everything that isn't nailed down under such conditions, because the commercial banks will be worried about their balance sheets again (correspondingly not lending money) - worried about their survival.
This is not the case right now however, where in fact we likely have new highs in a cross-section of equity markets to look forward in the New Year. A typical post election performance puts a bid under the stock market into January, and as long as fiscal cliff concerns can be placated until then I see no reason why strength should not remain dominant into next year. Again, as long as the speculators are betting the wrong way (down) prices should head the other way. And if the precious metal market charts below posses any predictive value, the moves higher could be explosive. Let look at gold first. (See Figure 1)
Of all the sub-markets in the precious metals sector, gold has been the least volatile because it is an international market, and for that reason influenced less by fraudulent Western (primarily US) paper pricing mechanisms. For this reason gold ascent has been relentless, ten-years running now, which is like no other move in history. 2012 would be the first year since the secular bull market began in 2001 that it does not better the previous years highs if prices do not vex the $2000 mark, however the year is not over yet so we must wait to see just what happens. For now it's enough to know prices have repelled off of the previous decade's growth channel and are poised to accelerate higher in a developing and steeper channel (not indicated) that will eventually mature into a parabolic blow-off as cycles continue to intensify. (i.e. think Contracting Fibonacci Spiral [CFS].)
But it's not the gold market that is exciting. It's all the other sub-markets in the sector that have been repressed by Western paper pricing mechanisms that hold the best potential(s) for outsized gains moving forward. Here, we are talking about silver (including segregated and backed trusts) and precious metals shares primarily, leaving leveraged ETF's, options, and other substitutes / derivatives to the gamblers (most ending up losers) who choose to play in these markets. And to narrow it down further for the purposes of today's commentary, the focus will be on the Amex Gold Bugs Index (HUI), the most closely followed index in the sector. (See Figure 2)
As you can see above, and opposite to gold, instead of breaking higher out of last decade's growth channel, HUI has broken down several times (2008 and this year), with this year's break far more mild than the former. Why are the shares more volatile? Answer: Because they trade more like shares than precious metals, meaning they are heavily influenced by both liquidity and sentiment related conditions, not to mention vulgarities associate with official price management efforts. (i.e. everything from futures to HFT related manipulation.) The good news in this regard is physical off-take constraints associated with bullion (if prices stay too low Western authorities will eventually run out) will eventually leave the shares as the only means of participation in precious metals for Westerners, which would bring a strong bid into the market.
And we may get another taste of what this is like if (when) the HUI breaks back into its growth channel, implying a move back the channel top is in the cards. This would put HUI in excess of 1000, which is a move that could be accomplished much faster than just about anybody is contemplating (or even thinking possible) right now. (i.e. think fractal progression.) Moreover, if the technical indicators in Figure 2 support the possibility of such a more, these same metrics are screaming the possibilities in Figure 3 (see below), which is a weekly (all of today's charts are weekly) HUI / Gold Ratio plot. It should also be noted all this would bring a bid back into the junior explorers as well, where again, just about nobody is expecting such an outcome right now. (See Figure 3)
It's a funny thing about manipulated markets. They have a way of going where they should in time no matter how hard some people try to prevent it. Right now institutions are largely ignoring precious metals shares because this is in vogue due to efforts of the banking cartel who would rather have you owning risky debt securities / derivatives than anything else these days. This mania is set to end anytime now however, which will prove good for gold and silver in the end; again, including precious metals shares sooner than later if the above charts are any indication. Please remember from our last analysis, we need to see the CDNX back over 1700 to indicate a strong bid in juniors is expected. (Ed. Unfortunately this now appears less likely with both credit and the broads in possible longer-term trouble already.)
In focusing on key technicals associated with the above charts now, one should note the pressure that has been building in both the HUI and HUI / Gold Ratio since the bull's inception reflected in massive RSI diamonds (and in ROC as well), where recent breakouts are likely just being tested at present. The thing to realize here is just how profound these diamonds are technically. They represent tremendous pressure being built-up in the market that will need to be released one day, and this day could be closer than we think. (i.e. when will the mania in precious metals and related shares begin.) Not even 1% of global assets are in precious metals yet, meaning this allocation must more than quintuple in order to reach historic extremes.
And while it might take until after an equity market(s) low in 2014 for the mania in precious metals to begin (as explained above), once HUI breaks above recent highs and back into its growth channel, which would be confirmed with three consecutive closes above 550 as per our Progressive Interval System (PI), we should get a taste of what this would be like before equities turn lower next year, with new highs expected for both the metals and share indexes. (Ed. Unfortunately this view has now become questionable.) Obviously we will have tax loss selling in the juniors until December, but after that, in January, they should catch a bid as well. And again, not many are expecting this; but let me explain how this could happen from a sentiment / market mechanism perspective.
Speculators will have little reason to be bullish on equities moving past the election since it will be perceived the bureaucracy's price managers will be less likely to support the markets. (i.e. this is especially true in the first two years of a new Presidential term.) And we will know this is the case if key US index and ETF open interest put / call ratios begin creeping up again post expiry, where this would signal hedgers / speculators are becoming more cautious due to Presidential Cycle considerations, the fiscal cliff, etc. This would be the wall of worry required to extend equity market strength further into 2013 than now seems likely. And this would also be the backdrop for the dollar($) to decline into next year, correspondingly allowing precious metals to rally.
Much angst is building concerning the fiscal cliff, so if austerity measures are delayed for a year or so (this is a long lime to short-term thinkers), which is now being bandied about, such an outcome would be the release necessary to spark a sizable rally in equities, possibly yielding new highs in the broads (except the NASDAQ), precious metals, you name it. (Ed. Unfortunately this view is now suspect as well.) Credit would continue to expand, at least initially, and banks would likely continue to liberalize lending practices again, especially if the Fed ever stopped paying them for holding assets. (Ed. Unfortunately speculators make this view suspect now.) This is of course the big stick the Fed still has, which we expect to see used coming out of the 2014 cycle low in equities, the economy, etc.
Fast forward to present and unfortunately it in fact appears a great deal more work maybe necessary for precious metals and their related shares to set a sustained trend higher with other markets potentially just starting troubled times.
Watch the HUI. It needs to recover the large round number at 500 before it sinks below important support at 460 in order to signal it's taking another run at channel resistance indicated above in Figure 2.
Good investing all.