In The Heart Of The Mania

By: Captain Hook | Mon, Jun 4, 2007
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Below is an excerpt from a commentary that originally appeared at Treasure Chests for the benefit of subscribers on Tuesday, May 15th, 2007.

That's where we are at present - right in the heart of the mania. Are we referring to the stock market mania in isolation? Heck no. We are referring to the source of all the manically derived asset bubbles floating round these days, that being the mother of all bubbles then, the credit bubble. And as Doug Noland correctly points out this week in his column, Credit Bubble Bulletin, and as alluded to above, it should be realized these bubbles include more than just 'investments', but all sorts of things (collectibles), such as fine art. Of course the banking community does not care what people are buying and selling just so long as they are doing exactly that, and at an increasing rate if possible so their job of tinkering with growth rates is eased. Unfortunately for them however, along with the rest of us who will also unfortunately reap the whirlwind of misbegotten gains due to credit bubble imbalances, because fiat currency based economies collapse onto themselves through time, this is of course not to be the case if history is a good guide. In terms of breaking this understanding into understandable 'bite size' chunks, I offer the below.

First you have inflation, which by definition refers to the expansion of a monetary base; and then, as a result of too much money chasing too few goods, which occurs if the rate of inflation outstrips natural capital destruction rates in an economy, you have generally rising price levels. Here, it's important to note in terms of our 'modern' fiat currency / asset based economies that because debasement rates are getting more generous, as central authorities react to an increasingly sluggish economy due to higher capital destruction rates (stagflation), asset bubbles become common place, with the larger sequence including echo-bubble episodes as capital continues to chase rotating manias. Further to this, it should also be realized that as the larger sequence matures, lags between accelerating monetary debasement rates and rising price levels shorten, where as with a junkie, growing dependency on the very agent that will ultimately be the cause of destruction becomes more intense. Thus, the impact of accelerating largesse on an addicted economy also becomes increasingly fleeting, because the industries spawned under such circumstances are not sponsors of regenerative growth within an economy. (i.e. think services and financial, along with increasing government.)

In terms of today's world, and because Western economies are now maturing rapidly, locked in the latter stages of a mature fiat economy cycle as described above, officials, industry leaders, and capital, in prolonging the larger sequence, have effectively steered regenerative manufacturing industry over seas to China in tapping a cheap labor pool, rounding out the larger maturation process within the context of an integrated global economy. And without a doubt these measures have been extremely effective in extending the larger economic growth cycle, which for our purposes here today, we will define in terms of the larger credit cycle. Here, because emerging economies of Asia are now being drawn into the Western fiat based economy in becoming the 'industrial component' of the larger global system, a rapidly expanding middle-class in the East is now feeding a hungry Western banking model, with the net effect being the need for accelerating speed in credit growth rates having been met up to this point. In this respect however, there is reason to believe that despite breakneck growth trajectories being experienced in Asia, soon this will no longer be enough to feed the Western banking model, and that because of this hyperinflation may ensue. This is of course how all fiat currency / credit based systems are resolved in the end.

Of course another key ingredient in perpetuating a credit bubble of current proportions is the suppression of any viable alternatives to all varieties of fiat specie, where we are referring to gold at the forefront of the tangible world of course. Gold has been 'first recourse money' for thousands of years, meaning it has been the most desired form of money in the history of man. As societies both mature and prosper from time to time however, with the citizenry becoming corrupted resulting from the easy life offered by establishment types, (think bankers, politicos, and business leaders), characteristically 'bad money policies' arise, usually as a result of technological development that ushers in a period of prosperity confidence men grasp onto in furthering their own fortunes. Here, the population is slowly desensitized to sound money policies through propaganda on a regular basis. At present, with the influence of the banking community never higher in a society, the vast majority of the current population is completely oblivious to 'bad money policies' being administered like never before in history, creating one of the most striking examples of irony ever this author is aware of considering we are suppose to be 'educated' these days.

And it gets worse, where just this past week we witnessed another blatant example of gold price manipulation on the part of the banking community in what appears to be responsible commentary from higher channels, only to be followed up with a paper gold related 'smash job' after what looks to be more of a set-up in hindsight. Of what do we refer? Let's put the events together for you. First, on Wednesday, May 9th, Bank of America Corp. Chief Executive Officer Ken Lewis said a so-called credit bubble is about to break after six years of historically low interest rates and relaxed lending criteria. 'We are close to a time when we'll look back and say we did some stupid things,' Lewis said... 'We need a little more sanity in a period in which everyone feels invincible and thinks this is different.' This was the set-up, where on the surface, and considering the stretched nature of the credit bubble, one could have concluded that at a minimum, a key banker 'kingpin' is feeling a little guilty, and wanted to clear his conscience. And who knows, perhaps this is actually what he was doing independent of his price-fixing buddies. Leaving this little bit of speculation aside however, as alluded to above, his comments also look like some kind of a set-up to affect the mood in the gold market, one of increased complacency, just prior to a COT related gold raid on Thursday, where vulnerable longs were flushed out of their positions just prior to a worse than expected Producer Price Index (PPI) report Friday.

And boy were they successful once again, flushing the speculative longs out of their positions to the tune of 2.3-percent in just one trading session. Is this manipulation? We will leave this determination to you, but one thing is for sure, the gold price did not just start falling on it's own, somebody, or group of somebody's, had to give it a push. Moreover, it should be noted that for the first time in ages the Fed actually withdrew liquidity from the system last week. So, the question then arises with the PPI report the very next day, along with enough inflation in the pipe to choke a horse, who in their right mind would be selling gold at such a juncture? What is even a greater irony, and possibly something completely unintentional from a price management perspective, meaning while price managers may not wish gold over $700 right now, at the same time they don't want it collapsing either due to the message this sends (deflation), you should be aware of the possibility they may actually be responsible for triggering such an undesired consequence if episodes like the one last week persist, where in case you have not been keeping in tune with what has been happening out there, gold is in fact undoubtedly tied to the fortunes of the larger equity complex. (See Figure 1)

Figure 1

Further to this line of thinking, the risk we must be mindful of then, is the GDX (industrial metals complex) and Dow are both possibly only one Minor Degree wave away from an Intermediate Degree top, at a minimum, meaning in as short a time as possibly only a week or two from now, the larger equity complex could be 'topped', and gold could in fact break down further after a near-term liquidity related recovery associated with generally rising prices. Sound impossible to you with all the liquidity floating around everybody is talking about now these days? Well, for one thing, when both the public and media get a hold of something like they have with regard to the liquidity story of late, this usually means the party is just about to end. In this case, and in fact just in front of the top in 1929, the liquidity story became 'common knowledge' as well, with monetary authorities deciding to pull back on the reins at the time because of increasing pressure to slow the pace of currency debasement. The question then arises considering we are at what appears to be another Super-Cycle top in equities, 'are we about to repeat in this regard?' Here, if we use the Dow as the ultimate measure of the equity complex, which seems fitting considering it's continued out-performance these days, this next picture could be considered a little frightening, with again, as mentioned above, a possible initial top only weeks away, along with the possibility of a double top test a month later in July. (See Figure 2)

Figure 2

As you can see above with respect to the time line analysis presented, we are not just 'Whistling Dixie' here, where a very strong historical / technically related case for such a double top can be made in putting together this picture, along with our best fitting analog based comparison to the last Super-Cycle peak in US stocks seen here in Figure 1. What chain of events could cause such an outcome? As mentioned above, price managers must have been getting quite worried about the potential messages being signaled by a gold price over $700, which was the impetus for yet another intervention. Here, the speculators long COMEX paper were ripe for the picking with record positions on the books, leaving the door open for price managers to push black box traders over the edge in running their stops. The reason I am going over this sequence again in greater detail is to show you the importance of paper market structure in determining price movements these days, where price managers routinely suppress the price of gold due to excessive bullish bets on one side of the equation, along with goosing the stock market on the other via a never ending short squeeze higher due to all the negative bets on US stock indexes.

Does such an outcome sound impossible to you with all that liquidity floating around, not to mention prices are generally going through the roof? Here, according to Stephen Williams over at Shadow Government Statistics, the Consumer Price Index (CPI) as defined in 1980 is still running in excess of 10-percent, with M3 having recently accelerating to a 13-percent growth rate. The question then begs, why would gold continue to under-perform the larger equity complex? And assuming this trend continues, what would a falling stock market do to the gold price? These are two very important questions at this juncture, which we will endeavor to answer below.

In answering the first question from above then, it should in fact be obvious to you if you are a regular reader of our work that the reason gold continues to under-perform the stock market is simply because of the fact retail participants continue to bet predominantly bullish in the gold market; again, as measured by COT statistics, set against a much more cautious retail crowd when it comes to the stock market, most readily measured by put / call ratios on the major US indexes, where one can find daily detailed quotes in this respect here. Further to this, it should be noted we have now had a clear breakout on the Dow / Gold Ratio, technically substantiating this condition should be considered a bona fide trend change, if only on a cyclical basis. Of course this breakout should prove 'false' and unsustainable however, because rising costs will eventually eat up all corporate profits. But because the gold market is essentially 'rigged' in large part due to constraints associated with paper pricing mechanisms, as long as market participants continue to 'bet' in COMEX gold instead of 'investing' in the real McCoy, this condition will persist.

Does this imply only paper market constraints will continue to affect the gold price? This is a loaded question in two respects. First, with respect to more near-term price action, while it appears officials may be making a mistake in suppressing the gold price now (if their goal is truly general price stability), as it has become vulnerable to a paper pricing related sell-off that I will explain further in just a moment, a very large part of the gold suppression scheme also involves the strategic deployment of physical gold onto the market at critical times as well. And as mentioned some weeks back, because monetary debasement rates and prices are rising, officials happen to think now is one of those times. So, in answer to the question directly above - no - price managers also need to dump actual physical gold onto the market in high demand times to keep the price down, as well.

The reason it would be a mistake to continue such a practice from this point forward however is because paper market (think COT) related constraints will likely be enough to do the job, as remarkably, Open Interest (OI) actually went up last week, not down, meaning speculators are even more long the paper, leaving price stability particularly vulnerable considering both gold and it's related equities are currently on critical / trend defining supports. Below is a picture of gold that captures the fact multiple indicator related diamond supports are now being tested, where weakness past yesterday's (and last week's) lows at $666 spot, the sign of the devil, would effectively break gold down from an indictor perspective. Here, a break of this support would usher in all kinds of possibilities, especially if the stock market were to join in such price action. And while we will cover this topic in more detail below, in terms of a likely target if diamond related supports are broken, it should be noted very strong double signature Fibonacci resonance related support lies at approximately $610. So, if $650 is breached, this is where I would expect to see gold find support if the larger move does not turn out to be something more serious. (See Figure 3)

Figure 3

Moving onto precious metals shares now, as per above, here is a snapshot of the Amex Gold Bugs Index (HUI), showing that although yesterday's (and last week's) price action did not break the indictors down, any further weakness past these lows would do the trick. And again, as with gold, these are important indicator supports defining very large structures (think multi-year diamonds), so breaks to the downside must be taken seriously. (See Figure 4)

Figure 4

In finishing up our thoughts from above then, and irrespective of the fact intermediate-term weakness in gold could be more than you were bargaining for, I would just like to leave you with one consoling thought in this respect. And that is despite the fact prices could fall fairly dramatically as summer / autumn approach, it must be remembered buying physical gold is not as much an investment as it is an exercise in attempting to preserve wealth over meaningful lengths of time. That is to say one does not buy gold or silver bullion to trade, not just because such an exercise would be expensive from a transaction related perspective, but more so due to the profound nature hard money (gold and silver) transcends paper related machinations designed to part you with your savings via inflation over time.

So, make sure you buy a little of that Central Bank bullion and some coins along the way. Coins are preferred from the perspective they are least likely to be confiscated in being defined either a rare collectible, or legal tender. Not knowing the extent of confiscation agendas on the part of authorities at this point, we will not speculate further on this subject accept to point out owning bullion is not a panacea with regard to getting physical, where diversifying the forms of your physical holdings past simple bullion is recommended. Past this, with respect to high net worth individuals who need to go beyond what they feel comfortable with storing on their own, electric gold services come into play, with James Turk's Goldmoney likely the best known due to his notoriety. Again however, it should be pointed out that here too, diversification is likely a sound idea, where with a company called BullionVault, not only can one store gold in London, as with Mr. Turk's service, but also in Switzerland, which in my mind would be the last place confiscation should become an issue amongst what are considered 'safe' countries.

If this is the kind of analysis you are looking for, we invite you to visit our new and improved web site and discover more about how our service can further aid you in achieving your financial goals. For your information, our new site includes such improvements as automated subscriptions, improvements to trend identifying / professionally annotated charts, to the more detailed quote pages exclusively designed for independent investors who like to stay on top of things. Here, in addition to improving our advisory service, our aim is to also provide a resource center, one where you have access to well presented 'key' information concerning the markets we cover.

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Good investing all.

 


 

Captain Hook

Author: Captain Hook

Captain Hook
TreasureChests.info

Treasure Chests is a market timing service specializing in value-based position trading in the precious metals and equity markets with an orientation geared to identifying intermediate-term swing trading opportunities. Specific opportunities are identified utilizing a combination of fundamental, technical, and inter-market analysis. This style of investing has proven very successful for wealthy and sophisticated investors, as it reduces risk and enhances returns when the methodology is applied effectively. Those interested in discovering more about how the strategies described above can enhance your wealth should visit our web site at Treasure Chests.

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