The following is commentary that originally appeared at Treasure Chests for the benefit of subscribers on Wednesday, Feb 20th, 2013.
As with the movie Groundhog Day, for the stock market it's been the same routine day after day all year now (not witnessed since 1967), where good is good news, but bad news is even better. So as with Bill Murray held captive in Punxsutawney to the point of insanity, for speculators this is an equally frustrating situation because on the surface, meaning the economy, technicals, and common sense, all suggest stocks should be falling, and yet, seemingly, every morning, futures are higher in the good ole US of A - land of the free - home of the brave - and now a slave state to the oligarchs much like the bourgeois ruled France some 200 years ago. (i.e. inciting the French Revolution.)
Because anybody looking at this situation from the outside (which may mean outer space today) would think it peculiar without a doubt, however given the degree of decay in our centrally planned fiat currency economy(s) these days it seems the greater the distress the more delusional people get, with present conditions akin to Roman times of Bread and Circuses. The rich are getting richer (the top 1%) by imposing financial repression on the rest of us, forcing people to take increasingly drastic measures until something blows. Dynasties like the Third Reich were engendered under such conditions, and the US is making great strides in this direction presently with the neo-Nazis in the White House aggressively dismantling the Constitution.
In terms of what is happening in the stock market, the oligarchs have their bureaucrats working hard to maintain the illusion, where present circumstances do nothing but further the cause ironically. Speculators and hedgers watch stocks rise to conspicuously unsustainable levels and attempt to profit from what appears to be irrational behavior only to be met by a flood of new money arriving on the scene almost every day in order to squeeze the unsuspecting dupes out of their positions - again - where we are approaching extreme conditions (and in some cases exceeding) not witnessed since the top (in stocks, credit, the bubble) in 2008. And it's not over.
The next potentially devastating event on the US front is the Sequester, where it would be surprising to see the Beltway Boys allowing this to go through given their biggest lobbies would be materially affected. No, instead they are attempting to screw short sellers again with one of their chief agents pulled out of mothballs on Friday specifically to entice the stupids into increasing their short positions so that they can be squeezed out in a few weeks, just as was the case with the Fiscal Cliff at New Years. Of course the larger move is far more mature at this stage (they will not have this again), but make no mistake, stocks should surge when it becomes understood the fix is in. We know this because stocks are still short of 2008 extremes and need one more good push to get there, discussed a few weeks back. (i.e. SPX cash to the 1550 area minimally.)
With options expiry now past last Friday, stocks may experience increased volatility as we approach the Sequester deadline at months end due to the fact the next series (March expiries) have least effect on the trade this far out; however once we are there, if open interest put / call ratios on key US indexes and ETF's (see charts updated here) are high and rising once again, expect much of the same - more Groundhog Day extremes - especially as currency wars (think accelerating global currency debasement) heating up. Of course if this happens, and again, given the mature stage of the present rally, some degree of a top would likely be marked at that time, allowing for a correction in preparation for the debt ceiling related ramp job to be expected as May approaches. Along these lines, and with the G-20 rubber stamping a continued slide in the yen over the weekend, don't be surprised if it sells off against the dollar($) running into month's end (propping global equities a la yen carry trade), into Fibonacci resonance related resistance indicated below. (See Figure 1)
So it's important to understand not just the domestic situation in the States is propelling stocks higher, but the global profile, where the bureaucracy's price managers use every angle at their disposal to keep the 'everything is just fine' illusion alive. And naturally a large part of this is keeping precious metals under control. This job has become much easier for them since last year because the speculators still alive in the sector always bet bullish, which allows the computers to keep prices subdued. (i.e. unlike the broads - no short squeezing is possible for precious metals.) And again, the situation is getting worse, because not only are key open interest put / call ratios falling with prices (see Figures 15 to 20 updated here); but more, outright short positions are largely doing the same (see attached charts); which again, is not constructive for higher prices in spite of key ratios having reached what could prove to be an important turning point under the right conditions. (See Figure 2)
Because the Silver COT is suggestive of an extreme event in the not too distant future with open interest at all time highs. Either a commercial short squeeze or speculator long liquidation is in the cards. Unfortunately with both key open interest put / call ratios (see attached above) and short interest (see attached above) for SLV falling with prices, the chances of a meaningful rally from here remain poor because once the broad markets top, liquidity conditions will suffer at first, until central authorities turn on the printing presses for real. You should know this is not the case at present. What needs to occur is another grand 'bailout event' like in 2008 to take the rate of change in the monetary base to higher trajectories sufficiently to cause enough 'spillover liquidity' to seep out of the banks in order to bring consumer's cash flow and balance sheets back into better standing - temporary as this might be.
Bankers are of course reticent to do this because if this were to occur, commodity prices would double, and precious metals would go ballistic (which is what we expect to occur starting in 2015 in concert with a cessation of consolidation in shadow banking debt), which is not what they want. If this were to occur, money multipliers would turn positive again, and some degree of hyperinflation will be experienced in the global economy. All out hyperinflation is of course not likely because sovereign debt market implosions will be a limiting factor; however make no mistake about it, many people will be priced out of existence with what will occur, and investors will flock to precious metals in an attempt to preserve their wealth.
In the meantime however, bankers continue to print money and hoard the liquidity on their own balance sheets, using this liquidity to prop up favored markets (debt and equity) and suppress the disfavored (think precious metals and commodities). And while they are having great success with gold and silver in this regard, they are not doing so well in other key areas that will eventually reach up and bite them where it hurts. Unfortunately, rising input prices will also hurt the miners, which makes you wonder when precious metals shares will get a break.
Rest assured they will get a break at some point however, and it won't be some banker manufactured hedging play to guard against 'risk off'. At some point the inflation will be so pronounced that the algos and machines won't matter, where in fact they will be forced to embrace precious metals for their perceived survival. This sentiment will become understood very well in the not too distant future, making present concerns seem distant, regrettable, and foolhardy.
Never the less, in the immediate future, if gold closes below $1600 on a weekly basis we must expect a spike down towards $1500, where if breached as well, would propel prices towards $1400 obviously. This is a very real risk as the economy continues to falter, liquidity remains constrained, and stock markets work on lasting tops. (i.e. which will exacerbate deteriorating liquidity conditions at some point.) A surprising turn higher in the $ would be your signal big trouble lies ahead in this regard.
But apparently this is what it's going to take in order to bring exhaustion to paper market precious metals speculators. As long as key put / call ratios and short interest keep dropping with prices, as is the case now, precious metals will continue to fall no matter how many key ratios hit their targets. This, along with an attitude adjustment concerning macro-conditions is necessary to engender a lasting bottom in precious metals, where given current conditions (and allowing for an oversold bounce along the way), long-term investors remain in a world of pain.
Therein, if the HUI does not hold 375 this week expect the Golden Retrace off 2009 lows at 338 to be tested soon - very soon. If on the other hand we have a close back above 400, then a lasting bounce may be in the cards. Look for silver to signal a bullish turn with a finish back over the large round number at $30 as well. If this does not occur, which is what is anticipated, again, look for precious metals shares to fall to Golden Retrace support(s), as outlined above.
Fast forward to today and the HUI is in fact vexing Golden Retrace support, leaving many wondering what to do now?
Buy more to watch precious metals slip slide away again.
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Good investing all.