Normally, this being the case, we would be expecting a ‘buy the rumor and sell the news’ set-up to develop, even if only on a very short-term basis; however this is not the case this time around. Why? Assuming gold and silver take a rest today, which would take some heat off the move in and of itself, this view hinges on the observation as long as no longer-dated Treasury auction is planned, like the one for today (which is why you can expect the metals to correct today), precious metals (and often stocks) are not suppressed by liquidity issues associated with the draw of this debt (not to mention the manipulation to make the debt appear more attractive).

Further to this, and like the first part of this week, which has been good to the metals (equities), you should notice no longer-dated auctions are planned until Thursday of next week either (and the same for some time afterwards), meaning with relatively light Treasury issuance moving forward, one can expect precious metals to do well for some time on this basis as well. And even if the US Treasury bubble (or the Euro Zone) is about to burst, as William Engdahl suggests, this would be good for precious metals as well, given a high degree of tolerance for volatility might need be exhibited. Of course if Harry Dent (and Prechter) are right, deflation is just around the corner, and this would be bad for all equities / commodities, including gold and silver.

So, with layoffs potentially on the rise again (as deficits / budgets must be slashed), growth rates of the M’s contracting, foreclosures set to rise again, and charts like that of the Nikki looking ominous as it attempts to hang onto five-digits, the deflationists may finally be right. At the very least we should expect volatility to rise, right, however you would never know it with a plunging CBOE Volatility Index (VIX). In fact, in looking at the chart, the VIX appears to be counting down in fives to match the last rally, meaning if an ending diagonal (triangle) is not forming here, a move considerably below 20 could be in the cards. Personally I just can’t see this, not with open interest put / call ratios on the S&P 500 (SPX and SPY series) falling again, making any strength moving forward a potential terminal short squeeze. The first day such a sequence should be expected to end is on March 11^th, the anniversary of the low last year. (See Figure 1)

Add to this the trade in the SPX (and many other major indexes) is a potential head and shoulders pattern, and again, as with the Nikki, caution must continue to be exercised moving forward. In this regard, and as espoused in our last meeting (attached above), something that would ‘kick-in the afterburners’ for both stocks and precious metals is if the dollar ($) were to roll over, even if only to correct the advance. Here, one would expect the head and shoulders pattern in the SPX to be another ‘suckers play’ perpetuated on the shorts, yet again. This time around however, after the squeeze, I would think that as with the put buyers, aside from direct monetization (which would not do the trick by itself), all forms of artificial stimulus will have been expended for this cycle on an intermediate-term basis (minimally), and that a decline (of undeterminable magnitude at this point) should be anticipated.

Moving onto precious metals finally, as promised above, the first thing I would like to make perfectly clear is patterns are not going to matter as much here, because counter to what deflationists like Dent and Prechter see, the fundamental demand for gold and silver continues to grow, and will continue to do so for some time further no matter happens to macro-conditions. If deflation grips the macro, people will be afraid of keeping their money in banks and seek the safety of precious metals. And if inflation (hyperinflation) wins, which central banks are sure to attempt as a last straw measure, then growth rates in the M’s should reverse, and you know the rest of the story after that. It’s as simple as that. In the meantime however, we have charts like the weekly gold plot from the Chart Room pictured below to deal with. (See Figure 2)

As you can see above, right on cue, prices rolled over at a timeline top back in December and have been trending down ever since, with stochastics suggestive more of the same should be anticipated. And either way, whether Wave 1 of Primary C is completed here or not, measured by the December highs being exceeded (see this count below in Figure 3), or the running correction scenario pictured above keeps prices suppressed longer, as mentioned previously it doesn’t matter, gold will be back down at these prices again. So unless you are a shorter-term trader there’s nothing to get excited about at this point. In knowing this then, if one were to simply be going on what the M’s are doing (growth rates reversing), along with a good sampling of the sector specific ratios, like the HUI / Gold Ratio, which might have just completed an a – b – c correction higher, as mentioned previously, if one is not trading the short-term swings, keeping some investment capital aside for lows that might be lower lows come summer / fall is advisable at this point. (See Figure 3)

In looking at the above monthly gold plot, although it does have an a better technical appearance than the weekly, still, stochastics and indicators are stretched, where if RSI were to break channel support for example, the complexion of this chart would change completely. So let’s hope the Chinese start buying more gold with those foreign currency reserves apparently coming out of bonds, which will cue others, and eventually even the retail trade. Right now they are selling their scrap jewelry in pawnshops and through the mail, but eventually, purchase like this $400 million from Sprott will seem paltry. In this regard, and in bring our focus into the here and now, another close above the 50-day moving average on the Amex Gold Bugs Index (HUI) soon would go along way towards helping one ignore the potentially bearish patterns / larger liquidity concerns in the trade at the moment. (See Figure 4)

In terms of Figure 4, which is the monthly plot of the Philadelphia Gold and Silver / Gold Ratio, again, the message here is precious metals shares must remain buoyant or the indicated stochastic test will fail, potentially signaling prices might be headed back to the lows. So again, please keep in mind as long as gold can continue to hold above $1120, with $1130 being much better from a technical perspective, the word continues to be up. And the next chart shows why, where even if stocks turn lower, gold should be able to continue higher. This is the monthly Dow / Gold Ratio plot from the site that shows we are presently on a timeline turn that should be from up to down, a contention supported by the general observation the chart is no longer oversold. (See Figure 5)

With the $ putting in what appears to be a high level consolidation, one needs to worry equities remain poised to fail, joining our failing system, however again, if gold remains buoyant in spite of liquidity constraints, I for one am not about to second guess it, as it becomes the ultimate currency. And that’s exactly what is happening to it, as denoted above. Increasingly, more and more people are becoming fearful / disgusted about an out of control bureaucracy and exiting the system. This is an easy decision all things considered, which is undoubtedly why gold remains strong. So let’s hope it remains that way in spite of a more recent positive correlation with stocks. If gold can remain buoyant in spite of the longer-term Treasury auctions today this would be a positive in this regard.

And if the SPX can close above 1120 this would not hurt gold’s prospects either due to a stronger inflation trade coming into the equity complex, which will help to lift all boats. (i.e. except the $ with any luck.) For your information, and although any move could fail, it appears SPX is counting higher in fives, where after a correction, higher prices are expected from an Elliott perspective at this point. All that needs to happen to facilitate such an outcome is speculators must remain bearish and turn open interest put / call ratios back up for continued squeezing as expiry approaches on the 19^th. If this does not occur, and the $ doesn’t turn down for whatever reason (fundamental or technical), then a top in the vicinity of the 6^th (tomorrow) could turn out to be more important than one could ascertain at first blush.

So watch the metrics mentioned above, where again, if gold finishes strong for the week off a sympathetic Employment Report – don’t argue with it because don’t forget – it will be last man standing in the end no matter what happens in between.

See you next week.

Captain Hook

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