Stocks And Precious Metals In Extreme Territory

It is common knowledge that stocks and precious metals are inversely correlated. Hence, given the stock market trading at extremes, it is “expected market behaviour” that precious metals are trading at the opposite extreme. The S&P500 is relentlessly climbing to all time highs, driven by monetary bazookas of central bankers around the world. The question is just for how long this levitation can take place, knowing that “everyone and his dog” has moved to the same side of the boat. Internal market readings are not standing at all time highs (there are some exceptions though). On the other hand, the metals have only been recovering from a disastrous year (2013) and are in search of a solid bottom. In this article, Gary Christenson looks at the data under the hood of the stock and metals markets, as well as the fundamental strength of both.

Market extremes in stock and precious metals

  1. The S&P 500 Index hit another all-time high. All hail QE! This is great news for the 1% but did it help the lower 90% of the population?
  2. Margin debt on the NYSE hit a record high and has recently rolled over. Is it the sign of a bell ringing at the top?
  3. Robert Prechter just issued a short term “top” update for the stock market. He has been wrong before – will he be right this time?
  4. The S&P 500 looks “toppy.” Someday the “top callers” will be correct.
  5. The VIX (volatility index) just hit a 7 year low. The complacency in the S&P 500 might not be justified.
  6. Gold and silver look like they have bottomed – again. Can High-Frequency-Traders (HFT) force them even lower?
  7. Larry Edelson has finally issued a “buy” on gold, after nearly 3 years of bearish forecasts. His “war cycles” point up along with his prognosis for gold.
  8. Gold and silver stock breadth and volume oscillators have bottomed and turned up. These are additional indications of a bottom.
  9. The silver COT data (yes, I know, manipulated…) is, as I read it, as bullish for silver as it was at the silver bottom last June. This suggests another good buy zone either just passed or will arrive very soon.
  10. Many technical indicators for both silver and gold markets are deeply over-extended on the down-side and flashing “buy signals.”
  11. Silver has dropped back to levels seen in 2008 and 2010, before the run-up in late 2010 – April 2011. Is another big rally about to happen?
  12. Gold has fallen back to 2010 levels, but has not reached the June and December 2013 lows. Gold is also very over-extended on the down-side and indicators have turned up. Technical indicators for gold look similar to last December – before a decent rally.
  13. Nick Migiliaccio has just posted a buy alert. Pay Attention to these!
  14. The silver-to-gold ratio favors a larger rally in silver – based on 27 years of history.
  15. I see buy signals in the gold and silver markets and in the gold and silver mining stocks.
  16. The dollar index looks like it has peaked and rolled over.

Make no mistake. Monetary easing does not equal fundamental strength, as evidenced by the following two quotes.

David Kranzler“I’ve been told separately, independently, from two different sources that the elite insiders in the Department of Defense know that the demise of the dollar is inevitable.”

Michael Lombardi: “What is going on with world central banks since the Credit Crisis is unprecedented. Instead of letting economies follow their natural boom-and-bust cycles, central banks have intervened with nature and given money to too-big-to-fail companies, brought interest rates to artificially low levels, and printed trillions of dollars in new money to ‘smooth out the bust’.” Lombardi and he continues with “In my opinion, what this has really done is: 1) brought the stock market to another bubble situation; 2) made the rich richer; 3) made the poor poorer; and 4) stimulated inflation in America.”

Conclusions

“Printing money” will levitate the S&P but it won’t fix structural or solvency problems. The US, European, and Japanese economies are overloaded with debt, structural, and solvency problems. The S&P rally will end soon.

Gold and silver, by many measures, have fallen to the zone where we usually expect a good rally. Given that HFT, JP Morgan, and others seem to have more influence on the paper markets than fundamentals, physical demand, technical indicators, and common sense, we may get a good rally or another “sucker-punch.”

China and Russia have been buying massive amounts of physical gold and locking it away in their vaults – unlikely to be seen again. Western central banks have supplied much of the gold that was shipped east. Would you rather own physical gold, or paper debts, derivatives, and pieces of colored paper issued by a central bank? Apparently the Chinese and Russians decided to trust physical gold more than paper. I suspect the next few years will prove the wisdom of their decision.

Times are changing. Europe, Japan and the US have large problems. The “new normal” will benefit very few unless they are prepared for weaker currencies, capital controls, inflation, volatile markets, and massive “money printing.”

Physical gold is better insurance than debt based paper.

GE Christenson | aka Deviant Investor

Receive these articles per e-mail

Subscribe for the free weekly newsletter and receive 3 papers about physical precious metals investing