|
We are going to start this update on a positive note by pointing out that
the gold to silver ratio recently reached a 24-year record extreme as shown
by the 20-year chart for this ratio below, which alone is a sign that the
sector is close to a bottom and also that a major new bullmarket is likely to
start before much longer. However, there is the small matter of a looming
market crash and the collateral damage it could on inflict on most
everything, including the PM sector, to take into account.
 
Critical to gold’s fortunes around the time of the market
crash is what happens to the dollar around that time. Back during the 2008
crash, as we know, the dollar rallied sharply due to a flight to cash coupled
with a move into the dollar to buy Treasuries. This time round it may not be
so straightforward because global bondmarkets are in deep trouble due to
careening deficits and the attendant risks of outright bankruptcy and
default, and there is a projected severe shortfall in demand for Treasuries.
This is a big reason for the Fed raising rates ahead of the competition, the
European Union and Japan etc, in order to create a rate differential so that
funds continue to flow into Treasuries, and in order to prop up the dollar,
because if the dollar drops significantly there will be less reason for
foreign investors to buy Treasuries since they will fear a loss of principal
if a dollar downtrend sets in. Another pressing reason to raise rates is to
create “wiggle room” to lower them again once the markets crash and they need
to firefight the situation. The reason that the Fed is caught between a rock
and hard place, to use a hackneyed old expression, is that they have to raise
rates much more than have already to create the desired wiggle room, but
because of the towering deficits, the markets will crash long before they
reach their rate target, especially as they are draining liquidity with their
QT (Quantitative Tightening) program, with the clamor for relief then forcing
them into emergency QE, which will have to be on a gargantuan unprecedented
scale, a development that will usher in the last and inevitable stage of the
fiat endgame, as the economy is vaporized in a firestorm of hyperinflation.
If you complacently think this only happens in banana republics like
Venezuela and Zimbabwe you better think again, because it can happen anywhere
that banana republic economics is employed, and sadly that includes pretty
much all of the Western World, thanks to the completely irresponsible descent
into fiat, which is paper money that is unbacked and intrinsically worthless.
With the above in mind we will attempt to figure what the Fed will do with
rates at its upcoming meeting this week. Some think it will chicken out of
raising them again according to its planned schedule, in order to avoid
crashing the markets, but if it does this the dollar is likely to tumble,
undermining future demand for Treasuries, and here we should note that the
Treasury market is far more important to the US than even the stockmarket,
because the Treasury market is the “parking lot” for a stupid world that has
spent decades swapping goods and services for piles of worthless paper. The
way this works is that the US pays for goods and services from other
countries by printing up heaps of dollars, which these countries then process
into Treasuries, foolishly thinking that they are like “money in the bank” –
just wait until the US springs the ultimate swindle trap on them by inflating
them away into oblivion, so that they one day realize that their Treasury
horde is nothing more than a pile of stinking garbage, which will mean that
they have been working for decades to keep the US supplied with goods and
services in exchange for nothing. If they really wanted to put “money in the
bank” then they wouldn’t be buying Treasuries at all, they would be buying
gold, and to be fair countries like China and Russia have woken up to this
reality and have been stashing away gold in recent years as fast as the fiat
entranced Western world will sell it to them. One of the bizarre ironies of
the situation in recent years is that the buying of Treasuries by foreign
countries has enabled the US to finance an all-powerful military machine
which they then use to threaten anyone who doesn’t conform to their dictates.
It’s rather like you walking up to some thug on the street, handing them a
big stick and then bending over and saying “Please sir, beat me.” However,
the penny is finally starting to drop, which is why the race is on, with
countries that want to remain independent like China and Russia scrambling to
beef up their militaries, and starve out their oppressor, or would be
oppressor so that it can no longer afford its giant military machine, by
de-dollarizing, and stashing away gold as fast as they can, so that someday
they can back their currencies with it. Needless to say, the oppressor is not
going to take this lying down, which is why a major war or wars are likely
before too much longer, and in many ways the global situation is similar to
the mid - 1910’s or the 1930’s. Some potential flashpoints are already
obvious, chief amongst which are the South China Sea, Taiwan and the Ukraine.
So, since dollar dominance in support of the Treasury market is much more
important to the US than even the stockmarket, it seems likely that the Fed
will stand firm and stick to its rate rise program, and the stockmarket can
do as it pleases. Only when things get really extreme is it likely to ride to
the rescue with emergency QE, which will lead to hyperinflation and a massive
reset where all the debts are wiped clean simply because they become
worthless and holders of Treasuries end up with what they deserve – nothing.
Gold will do a moonshot. The alternative to a stealth default by
hyperinflation is an outright default on many debts, and the reason why the
former option is preferable to the powers that be is that is it takes longer.
There are times in life when being frightened can save your wealth and it can
sometimes save your life. Egon Von Greyerz has written a string of lurid and
terrifying essays on what is heading our way. While the complacent and insouciant
majority easily dismiss him as simply “talking his book” because he herds
people into gold which is his business, or say that “even a stopped clock is
right twice a day” because he has been talking along these lines for years,
that does not mean that he is wrong. On the contrary, he looks more right
with each passing day, and his warnings should be taken seriously. Next
week’s Fed meeting promises to be a pivotal one when we find out if they are
going to “stay the course” and keep with their program or bow before pressure
and fold. If they do the former then our take is that the markets could
plunge and the dollar advance quite sharply, if the latter the dollar will
break down and gold and silver should rise sharply. Just how finely balanced
this situation is can be seen on the latest 2-year dollar chart where we see
that it has been in an undecided unresolved state for about 6 months now,
bumbling sideways beneath the neckline of a potential Head-and-Shoulders
bottom. Fluctuations have become very tight in recent weeks, implying that a
big decisive move is in the works, and the Fed is likely to trigger it next
week. If the Fed stands firm the dollar is likely to break out upside, which
should trigger a quite rapid run to the 102 – 103 area, if they turn yellow,
then the dollar will break down and the pattern abort.
There were signs of weakening in the Precious Metals markets
late last week suggesting that the Fed will “stick to the plot”. Let’s now
look at the latest charts. Starting with the 6-month chart for gold, we see
that, having been in a modest uptrend since mid-August, it reached a
trendline target about a week ago, beneath resistance and beneath a falling
200-day moving average, 3 negative factors which succeeded in pushing it
lower again by late last week.
COTs for gold had looked bullish until just 2 weeks ago,
but then the Commercials started piling on the shorts again as the Large
Specs came out of hiding. Good thing for the Smart Money that in this age of
instant communication, it takes 3 days, i.e. as long as it took to get to the
moon in 1969, to release the COT data – after all, one wouldn’t want the
ordinary investor to know what’s going on under the hood, would one? – that
would definitely reduce the edge. Whilst still far from flat out bearish, the
marked deterioration over the past two weeks has opened up the risk of a drop
again, and it is interesting to note that silver’s latest COT showed quite
severe deterioration.
Click on chart to popup a larger, clearer version. Whilst
we initially passed off the rather sharp drop into August of this year as the
price dropping back to form a Right Shoulder of a Head-and-Shoulders bottom,
this drop rather spoiled the pattern as it involved a breakdown beneath the
uptrend line shown on the 10-year gold chart, and with a broad based market
crash drawing ever closer the risk is that all commodities get sucked into
it, especially if the dollar breaks higher again. In light of this the fact
that gold is starting to roll over again having just risen to touch the
underside of the failed uptrend line, and the weakening accumulation line,
looks rather ominous, and the worst case is that if the dollar rallies as the
stockmarket crashes, it could get caught up in a general maelstrom and wind up
back at the lower boundary of the large prospective downtrend channel shown,
which would put it at about $900. That should of course mark the end of it
and a violent reversal to the upside and explosive advance should follow as
the world’s Central Banks rush to man the pumps with the biggest QE program
ever, which should right the ship temporarily before it eventually founders
ignominiously on the reefs of hyperinflation.
We will now remind ourselves what happened to gold during
the 2008 crash, with a chart from that time. As we can see it wasn’t an
impressive performance, but its decline was more a function of a rising
dollar than a falling stockmarket…
Logically, if the economy tips into recession / depression,
we would expect demand for base and industrial metals – and commodities
generally – to contract, and it doesn’t look like gold and silver will be
granted a “get out of jail free” card. This next chart shows the dire
performance of commodities generally during the 2008 crash, and how they are
setting up for another plunge, with this CRB index on the point of breaking
down from a giant bearish Rising Wedge, that started to form back early in
2016.
With oil being an important component of the CRB index, it
is worth taking a quick look at the oil chart to see what is going on there.
Whilst some have opined that it is basing here, it looks much more likely
that it is instead forming a bear Flag, and, since these Flags “fly at
half-mast”, if it is we can expect another steep drop very soon, which
suggests another heavy drop in the broad stockmarket soon
As for the stockmarket, the key point to note is that it
is still marking out a giant top area, and the bearmarket proper, which is
likely to begin with a crash phase, won’t start until it has broken above the
lows of last February and April. Whilst it remains above these lows a rally
back towards the highs – which probably wouldn’t get beyond the resistance in
the 2800 area - is possible.
The last chart shows gold compared to the stockmarket
(S&P500 index). On this chart we can see the gold is good value now
relative to the stockmarket, but also that this ratio could become even more
favorable, which would be likely to happen during a market crash.
|
|
|
