Precious Metals
We noted that 1524 is critical resistance for gold. At yesterday’s close it resided at 1475, having risen $150/oz. over the last 2 weeks on an upside reaction from the violent dump to the low 1300’s. There is a preponderance of bearish analysis out there about this rally, which often makes me want to go the other way. But this time the road map is clear. The price of gold is bearish until critical resistance at 1524 is retaken and held. The value of gold will be realized one day when the time is right.
Silver is even more bearish. While I would like to see a rise to 26 in order to trade short, the target remains below 20 and it is yawning like a gaping maw. This is the case as long as silver remains below big resistance at 26.
In its failure to make a strong move off the high volume low 2 weeks ago, HUI is forming a new potential bear flag. Yes, it broke the small flag it was forming last week with a strong up day, but the hard decline Friday and tepid recovery yesterday have merely reshaped and expanded it. This comes off of the most intense volume-driven over sold condition yet, and an over sold RSI has gotten above 30 and STO above 20. These are usually positive signs.
But a review of the GDX and GDXJ ETFs indicates troublingly low volume on yesterday’s rise. Keeping in mind that this is a counter-trend rise, the technical situation argues for most people to have lots of cash and to be aware of what the trend is, which is down. Traders wanting a continued bounce from the over sold low should not tolerate what is now a more mature flag, if it begins to break down.
Speaking personally, I am going to value cash. If HUI holds and disqualifies the flag and then continues upward I will look to buy the DUST bear ETF against any longs I may hold and possibly one day just DUST for a straight on bear trade (cash is always fool proof however!). On silver, either put options or the DSLV/ZSL bear ETFs would do. Again, I’d like to see 26 before taking bear positions but the market moves as the market moves. These are just general sketches of plans on what one manager might do.
Broad Market
Again, I cannot stress enough how important high cash levels are right now. The stock market is trying to say “put your cash here, you can trust me!” but I do not buy it. As you know, we hold open a scenario for a ‘healthy’ correction to SPX 1350-1450, which in my opinion is a shortable trade (bear positions were again closed yesterday morning in ignominy). But the more stretched this market becomes, the more vulnerable it would be to a serious downside reaction when ever the time is finally right. Many markets are simply stretched too far above important moving averages.
So I will continue the ritual of poking short and limiting risk (read: taking very limited losses) and try to be on the right side of things when the turn finally comes.
Bottom Line
Precious metals and commodity players should value cash because there are few signs of inflation in the metrics most people look at, which is prices. Of course what is being reported as currently low ‘inflation’ and what sits on the shelf at the supermarket and below the pump at the gas station must be the results of previous, embedded inflations. This new one, with a money supply that looks like a hockey stick with the blade pointing up, is no danger to future prices (that’s the story anyway).
For as long as this perception remains in place, the first sniffers of a future inflation problem, gold, silver and commodities (in that order) are vulnerable. Again, the majority measures inflation by official CPI, PPI, etc. as long as confidence remains in our leaders. And with the stock market flying around way up there, why shouldn’t the majority be confident in our leaders?
Because this Goldilocks phase will end as it was officially created and sponsored every step of the way by policy, not organic economic activity. When it ends, the featured condition will as usual be the struggle between the forces of deflation and those of inflation. The current time period argues to be prepared for deflation first, in all the traditional ways. There are 3 main ones. They are cash, cash and cash… and T bonds if you are comfortable owning the debt of entities that inflate currency as a mode of operation.
Speaking of inflation, my gut tells me that would come next. But when? There will be a price to pay for a free ticket that policy makers seem to have punched on the current macro backdrop. There never is a free lunch, but there are long periods when a lot of pigs can dine. We are in one now and with the stock market gaining upside momentum, I do not think it will be long before a flame out happens. Standing in the way of this can hurt but dialing out to a bigger picture, think about silver’s fate in 2011. Booms end in busts.
So the stock market should turn down now for it to have a reasonable chance of not going bust. An upside acceleration from here is not likely to end well.
As boring as it sounds, people might resist the urge of over trade or chase momentum in a market that appears to be readying for change and just remain intact and in wait, as events play out. One day we can be more actionable, but that day is not here yet.
