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Here We Go Again
Well, here we are again, gripped in the heart of yet another mania blow-off, where both good and bad news is good for equities because so much liquidity is sloshing around. Add to this the banks, brokers, and Beltway Boys are doing their damdest to distract and obfuscate reality by any means possible, and you have markets doing all kinds of crazy and unexpected things, and generally behaving badly and broken. Perhaps the best example of this is found in this assessment of what the banks have their hedge funds / prop desks are doing with all the excess bank reserves recently added to the system because of the fiscal cliff thingy the bureaucracy is using to panic people into both 'rational and irrational behaviors' in order to exploit them. (ex. getting traders to buy puts and short stocks in order to engineer short squeeze(s) with the increasing liquidity.)
So, if you were wondering why the can kicking deal on New Years was taken as good news by the markets it's because the banks are attempting to desensitize the public to what will undoubtedly be increasingly bad news, which will backfire on them eventually by the way. Because eventually traders will no longer buy puts and short stocks in sufficient quantities in order to maintain this strategy; and, just like all other post bubble episodes, stocks will take a big hit, especially as we move into the strong cycle down years associated with an acceleration in consumer debt deflation anticipated this year and next. Harry Dent was making the rounds recently on this subject and how demographics play into the equation, which is his trademark. His arguments are sound and his predictions (timing) likely accurate, which happens to conform to our views here at Treasure Chests as well.
But the manipulation does not end with the stock market, as you should know if frequenting these pages. It extends to the fixed income and currency markets. And it's ever-present in precious metals in order to hide the inflation (think QE and other sordid money printing methods), the same inflation (money) that is ironically used to manage prices in all of these markets. Who is at the core of these fraudulent activities? You guessed it - again - it's your friendly high level bankers and their dogs (think hedge funds) that have self-gratification on their minds. Unfortunately for them however, this has not been helping their performances of late, with vast majority underperforming last year.
What's more, apparently we can look to this reason for precious metals being held back as well, with some forecasting this condition is about to end because redemptions from John Paulson's $19 billion Advantage Fund are to cease this week, taking the pressure off. What does this imply? It implies that the global gold price is largely controlled by New York based hedge fund managers and investors, and that little else matters. It raises questions like, 'what about silver, why has its performance been so poor too?' Is it the invisible hand of JP Morgan and its New York based hedge funds this time? The markets have become a joke, the extent of which many are only realizing now.
Now some will say, who cares as long as we are on to these characters, and our precious metals investments start going up again. And certainly this is right to an extent; however, one must wonder, if this is true, that New York based hedge funds (at the behest of their controlling banks who want to keep precious metals under wraps) control precious metals prices to this extent, what's to stop them from continuing to do so. And, what if redemptions persist considering important tops in both bonds (think of the threat of real rates going positive) and equities are a looming threat this year. It's difficult envisioning precious metals continuing to rise if liquidity conditions become increasingly challenged. This is the worry you see.
And what if the gamblers in the options markets continue to display out of control bullishness towards the sector? This would not be a recipe for a sustained rally. You will remember from last week we have little doubt that precious metals shares, as measured by the Amex Gold Bugs Index (HUI), would at a minimum test the 525 to 550 (think Progressive Interval System to be sure) range before possibly failing at this level due to liquidity conditions; and, we remain on this page with an open mind, where we will size up things again if prices make it to the target zone. If, for example, gambler betting practices have flipped around and the consensus has turned bearish, then we would be prone to be bullish (this is not the case now however), especially if money supply measures are also continuing to accelerate growth.
What's more, we will also look at how other key factors / indicators are performing after we have this anticipated 'relief rally' in the precious metals sector over the next little while. You will also remember I was expecting a bounce in the sector once index and ETF options expiry passed this Friday, likely taking us into early February, as was the case in the year 2000. (i.e. noting similarities to present circumstances.) Along these lines then, if for example the HUI shoots up to the 525 area over the coming fortnight, but lets say the Canadian Dollar (C$) does not budge and remains in the 102 area, if not worse, establishes a divergence and heads south, we will be unable to maintain a bullish stance at that time because the message will be clear - global liquidity conditions are about to contract on a wide-scale basis. (See Figure 1)
As you can see above, last Friday the C$ put in a shooting star reversal candle, so it's quite possible (if not likely) the indicated count is correct, and the corrective zigzag higher is now complete. (i.e. although it could sub-divide into a more complex pattern later.) With this in mind, one must be cautious regarding liquidity related optimism moving forward, although again, without a doubt the sociopath(s) that run things in New York (this is why) will continue to pull out the stops in order to maintain the illusion, so a more meaningful divergence in the C$ against stocks might need to build before prices follow. This might be the window of opportunity for precious metals (shares included) to zip higher post options expiry this Friday, closing that divergence first.
If on the other hand, by some miracle precious metals shares close this divergence to the C$ this week, which is unlikely given how the options gamblers are positioned, then we will differ to the chart below for guidance, knowing that it must extend to the indicated Fibonacci resonance related target before those educated on this subject matter would become bullish. (i.e. sensing capitulation.)This doesn't mean the meat heads in this market will not pull a 'crazy Ivan' and take precious metals shares higher temporarily anyway, it's a question of sustainability you see. (i.e. it should be noted the boys in New York have the algos set with a negative correlation between stocks and precious metals, which is unsustainable.) A bad sequence here is the kind of thing that could cause the failure at 525 that is possible, not that we are anywhere near that level just yet. (See Figure 2)
So, with the CBOE Volatility Index (VIX) on support at 5-year lows (see Figure 2) and tech stocks in trouble again, it will be up to the financials to hold the market(s) together, which again, they will undoubtedly endeavor to do. The problem is, in order to get stocks to go higher, they will either need to break the VIX down (unlikely on a lasting basis), or allow a limited sell-off in order to ratchet stocks higher against the VIX. Either way, the word sustainability does not come to mind here, however this kind of gaming could go on for some time.
Along this line of thinking, it appears small speculators in euro futures are now set-up for a squeeze which will put additional pressure on the dollar($), potentially laying the groundwork for a big move after ETF expiry this coming Friday. And we cannot forget about the cessation of hedge fund redemptions discussed above. And there is something new as well that could be an important factor moving forward, that being the repatriation of German gold reserves held in New York and Paris. All this could be the trigger to close the divergence in precious metals shares denoted above in Figure 1 and move the HUI up over key structural resistance at 460 so that we can go up and test 525.
On the negative side of the ledger we have the increased possibility the debt ceiling debate will go longer than the US has money, which is mid-February apparently. Both Geithner and Bernanke were out yesterday pointing that out, and that all restraint should be removed, which is of course Obama's sentiment as well. The problem here concerning a potential shock on gold's nominal pricing is that with Obama threatening to implement a whack of new gun controls, this will polarize the House even more (what a joke this kind of thinking has become), which could postpone debt ceiling talks for some time.
We will have to see just what kind of wimps we are dealing with in the House on all this, but Obama and the Dems have made the Republican's out to be the bad guys in the press already (with comments like 'we need to pay our bills') so it will be interesting to see whether the Beltway boys choose politics over the Constitution again.
Of course we know how this turned out now.
Here's hoping for a 'big rally' in precious metal at some point post expiry then. Some degree of a rally should occur in coming weeks no matter what happens, so be sure to be positioned for some relief in this regard.