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A Post Silver Crash Macro View

May 16, 2011 1:07 PM ETSLV, GLD, GDX, GDXJ, DIA, SPY, QQQ, TLT, IEF, UUP
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Gary Tanashian's Blog
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This week's edition of Notes From the Rabbit Hole extrapolated the violent changes in the gold-silver ratio into an intermediate view of macro markets.  We reviewed topping structures across various commodities and importantly, gold's ratio to these commodities, as this is primary to the investment case for premier gold stocks, both producers and explorers.  Targets have been set for the HUI.  The Treasury Bond continuum is intact, and as long as it remains so, we may navigate forward through difficult turning points and position correctly for coming trends, both intermediate and long term.  Meanwhile, here is the 'Wrap Up' segment from #136:

NFTRH136 Wrap Up (a Macro View)

USD is now at a point of notable resistance by weekly chart, after holding a last ditch support level. If USD is repelled here, most asset markets can rally. If it breaks through resistance decisively, watch for most asset markets to finally get the memo (I am talking to you and your domestic friends, Mr. Dow) that an intermediate bear phase is in place.

2 year yields have broken an uptrend, indicating a flight to safety. SPX thus far happily fails to get the memo.

Let’s take a bigger picture view of what could be in play. This is a picture that puffs up the deflationists in the near to intermediate term before ultimately validating the hyper inflation case.

Going with a theme we have used in the past, think of the prospect of deflation as a lever; a lever to be pulled when all looks lost and an economy built on debt and leverage is in danger of well, deflating. We all know that the macro managers have created a bubble economy, a pyramid scheme that depends on greater fools to buy in. Those greater fools routinely take the form of long-term Treasury bond buyers.

There is nothing like an established trend to finally get the herd interested in an investment theme, and a few more weeks of commodity top-building, along with an anticipated top in stock markets should attend a healthy decline in yields. Get the picture? The herd would like to buy T bonds at a less favorable yield because theyoperate on a positive correlation to fear and greed, unlike the players that want to be right, not comfortable.

Why then, might we not have a headline grabbing decline in yields to the bottom of the long-term trend channel, but well above the 2008 disaster? Will the cry for austerity and fiscal prudence have as much weight with a backdrop of tanking stock markets (along with individual IRA’s), even worse employment numbers and Paul Krugman telling the world about the Armageddon in store if we do not do the right thing and inflate, stimulate and generally employ more of the policy that got us here in the first (and second, and third, and so on) place?

In short, will the continuum not hold and launch the next inflation cycle? And if it does, can we then expect an ‘equal and opposite’ upside yield reaction to the 2008 downside channel buster? Will there finally be a revolution of some sort that stops the insanity of an ever increasing inflationary pressure that disenfranchises the middle and lower classes and enriches the wealthy and the asset ownership classes?

The Wrap Up asks a lot of questions this week, and do you know what? It is not prepared to give many definitive answers. But the questions need to be asked, and just knowing they are out there is half the battle. Meanwhile, NFTRH will continue to twittle its charts, tweak its portfolios and try to maintain a level of common sense every step of the way.

To summarize everything above, the GSR has turned up impulsively. This, after silver rose impulsively in a fashion eerily similar to the way oil did as it coincided with end of the 2003-2007 bull market. NFTRH has consistently been more bullish on gold than silver, even or perhaps especially as silver went vertical in an unsustainable blow off.  With silver’s open interest having dropped toward the lows of last summer, large 
speculators dumping aggressively and commercial shorts covering frantically, we can call this over hyped precious metal/commodity bombed out and constructive for the future.

As we know, during up phases silver tends to correlate better with the HUI Gold Bugs Index than gold does. The picture in silver is one that has gotten healthier yes, but do not expect any type of rebound other than a counter-trend one any time soon. The gold stock sector would have the same basic plan as well. If the crash in silver has indeed signaled a new deflationary phase, markets must work through the downside toward which the precious metals have led, and it is reasonable to expect multi-month consolidations in silver, gold stocks and to some lesser degree, gold.

Let’s once again review the big picture…

Silver, currently at 35.36, is above a small nook of support at 30, which is NFTRH’s ‘best case’ low, post-crash. Another level that may offer support is the long-term recovery peak from 1980 just below 25. Best and most dense support however, is around 20. I heard Bob Hoye comment that the bull market in silver is signaled as over with the recent rush toward 50 and subsequent crash. Above, two Cups are drawn. The green one targeted 35 +/-, which was not coincidentally near the NFTRH ‘best’ target of 33-34. Silver might have corrected from that point, but instead ignited a wicked brew of speculation, short covering and silver guru pumping. The negative case is that the bull ended as most do, in an unsustainable blow off. The positive case is that after months or years of handle making, a new (red) Cup could express toward a measured target of 95.

And then we have the old lagging fuddy duddy, gold. The silver bugs insisted that silver was regaining its rightful 16 to 1 ratio to gold and the believers bought it. As the blow off was gaining momentum, NFTRH showed versions of the two charts above to make the point that silver has not out performed gold over any significant time frame and indeed, only makes violent and ill-fated catch up moves on rare occasion.

Gold is acting as a barometer to the state of money, while silver is acting as a ‘play’. Well defined support levels are noted and I expect gold to be just fine even as another ‘play’, the USD, potentially gains the knee jerk reaction of the herd to some degree, as it did in 2008. If indeed the GSR and toppy looking commodities are signaling an oncoming deflationary contraction event, gold will out perform most items and gold mining fundamentals will return in spades; even if gold’s nominal price is pressured.

Therein will lay speculative opportunity as the majority of players who see the situation as ‘gold is silver is copper is oil is hogs is wheat’ in the inflationary hysterics game puke up quality gold mining and exploration assets; again.

With that, we end NFTRH136 as I get the feeling I am starting to bludgeon. Patience and big picture perspective my friends; this will see us through. There will be plenty to write about going forward and we will, to paraphrase Dylan, ultimately end up on the right side of whatever side there is.


Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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