Jokers Wild In Nominal Top: Metals Making Bottom But Market Outlook Grim

by: Emmet Kodesh

Justice is based on fair weights and measures and not favoring rich or poor. All values in society depend on justice. When it becomes a politicized function of power, every form of value and wealth will fail. We long since have lost "fair weights and measures." But now "crooked words" are disguised as raison d'etat and fiscal stability. Thus the most important economic signal of the week came from hearings about drones and banks "too big to jail."

As reported by David Weidner, the attorney general said, "The size of some of these institutions becomes so large that it does become difficult for us to prosecute them when we are hit with indications that if you do prosecute, if you do bring a criminal charge, it will have a negative impact on the national economy, perhaps even the world economy." In a healthy society such sentiments from a top Justice official would prompt impeachment. "Crooked words" now are packaged as raison d'etat and economic stability when of course they cause the opposite. The criterion of justice officially is power and bankers' privileges rationalized by their custodial solicitude for people. This destroys all forms of wealth. It destroys faith and credit. The rulers (governance has reverted to its literal meaning, to control or rule) command and intimidate. This is the essence of a fiat regime, one that eats out its own substance as fiat currencies consume economies. Markets die of this chicanery and force majeure, so do nations. Necessity is "the tyrant's plea."

The head of Justice has become a Fiscal Apologist-in-Chief. This confusion of roles ravages the economy and buries distress at the grass roots. The fakery in the system puts Americans on thin ice as the stats cited below show. It destroys accountability and fair dealings in socio-economic relations. In the mid and long term this will ravage the markets. Media cliches are like the "irrational exuberance" treated in the Graham-Shiller metric. Defensive positions become increasingly important.

Briefly mentioned in my last column was a point to keep central to your thinking about markets, the economy and where we are going. It took sixty-six months for the DOW to make a new high based on liquidity injections. Adjusted for genuine inflation it remains below the bubble highs of 2000 and October 2007. You remember what followed those tops. In that regard I reiterate another point from my previous piece. I noted that the collapse and late 2008 bottom in precious metals and mining prices preceded by 14 weeks the absolute bottom in equities. Yes, prices and sector trends are different now: equities have been surging higher rather than following the collapse in metals and miners. Still, the perversely low valuations of the miners, priced as if they had no reserves hints at underlying structural frailty in the economies for which their commodities are measures of value vital to production.

Overlooked among the dazzle of nominal DOW highs and surging YTD gains, factory orders declined in January. Consumer indebtedness rose. Taxes and tax rates also rose while growth, even the fatuous GDP metric fell not even counting understated inflation. Health care and "health insurance" costs continue rising, consuming larger portions of income and savings which cannot be replenished at the suppressed yield levels enforced by the Fed. Durable goods remain 14% below 2007 levels. Despite an inflated dollar the trade deficit is rising. By GAAP (Generally Accepted Accounting Principles) the national debt has averaged $5.2 trillion for five years. John Williams writes that "hyper inflation is a virtual certainty." His summary of economic activity is not auspicious.

In a December interview James Turk discusses the ratios of the DOW, FTSE and DAX to Gold. He shows that current market collapse began in 2000, the first secular peak which is similar to John Williams' view that the economy as distinct from the juiced markets has been in a double dip structural recession since June 2009 and is ripe for hyperinflation and severe correction if not collapse. In a new piece, Richard Russell has accepted this view and writes that the secular 1980-2007 has been succeeded by a long-term "bear correction." Turk cites his Barron's interview from October 2003 in which he argues that gold would outperform DOW in next decade. It did and it surely will survive the dollar.

Including inflation and based on previous cycles, Turk argues that gold should reach or exceed $8000 during the next two years. This thesis coheres with metrics presented by Approximity. Fed injections of digital debt money distort capital. As von Mises showed, "credit money" is debt that ends in systemic collapse. Fiat or decree currency is not money. Currencies lose their purchasing power, precious metals do not. Their value rises or falls against fiat currencies, which are not money but the metals retain their value against other essential goods. "Government counter-party risk has never been this high" Turk concludes.

Governments incur unpayable debts that crush citizens, crash the economy and facilitate a new managerial order. Most of the "liquid currency sloshing around the globe looking for a home to retain its value" will eventually find its way to gold or silver. Considering the specifics of this process and the attitude of the rulers to the ruled it is unclear how much those outside the circles of power will be able to share in the new monetary order based on true values. Blatant injustice at the top defies accountability and flaunts rather than shares power. Theodor Adorno described this in Enlightenment as Mass Deception, adding "enlightenment [ultimately] is totalitarian." The goal of the fiscal and political spectacles in DC is to exalt its own power and diminish other values.

Stumbling economies and demographic collapse in the West will not sustain these markets. Those who see precious metals as an alternative store of value must recognize that increasing global economic malaise will shrink demand and constrict funding for all commodities and basic material production. The hyperinflation ahead will produce a crushing deflationary depression that will impact miners as other business. I will explore this in forthcoming columns. Precious metals probably are putting in a bottom and recent bounces in mining shares suggest support for solid gains. Demand for the metals clearly is bullish, gold for monetary reasons and jewelry, silver for its myriad technological uses and as true money.

Returned from the Prospectors and Developers Conference in Toronto, Rick Rule reiterates that "values are astonishing for investors looking to establish or increase positions" in the miners while "pessimism is everywhere." He speaks of "major investors" seeking his advice on investing in best of breed companies. "General market conditions are terrible" he agrees, but for precious metals "the situation is better and better." Along with the fundamentals, this blend of interest and the apparent new bottom should signal the onset of a major bull in precious metals. Moreover, China is pushing for a new monetary order like that outlined by Meghnad Desai as described in a recent column on a new reserve including yuan, dollars, gold and other BRICS values. Use of the yuan (NYSEARCA:RMB) in international trade has almost tripled in the past two years. But genuine supply, credit and demand of precious metals are choked by the jokers in the deck, the fiat crowd. And when China decrees 8% growth targets it is not natural either. The problem is not mining per se or "economic nationalism" but global economies and the command-control or fiat model. A squeeze everywhere underlies the flood of liquidity that is washing away the roots of recovery.

So I reiterate previous advice to acquire assets based on agricultural land, natural resources and food like Sprott Resource Corp (OTCPK:SCPZF). Precious metal streaming companies like Silver Wheaton (SLW) or Sandstorm (NYSEMKT:SAND) are preferable to miners and bullion coins are best if a worst-case scenario occurs. I will discuss the best of the miners in a forthcoming column by which time a bottom may have solidified. Avoid the paper Gold (NYSEARCA:GLD) and Silver (NYSEARCA:SLV) paper ETFs and choose vehicles like Sprott Physical (NYSEARCA:PSLV). Have a low beta value ETF or fund like Vanguard's High Dividend Yield (NYSEARCA:VYM) for substantial allocation. Keep stops in place on your holdings to limit sudden slides. Those who have heard my suggestion of 10-20% precious metals and miners, 50-60% equities and the balance in cash in bonds should be pleased for now.

The drone out of Washington is unsettling and the new gold-backed monetary order may be a bridge too far for many of us to cross. The current volatility should give direction soon.

Disclosure: I am long SAND. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.