What’s more, this process feeds on itself, meaning the right combination of events can cause inflation to accelerate on its own. One could argue that inflation in the States at present causes other competing countries to accelerate their monetary debasement rates as well in the ‘race to zero’ a la competitive currency devaluations. All this being known however, financial structures are gargantuan these days, and in need of a great deal of support, where again short positions are ‘key’. Remove the favorable disposition these support mechanisms provide, and stocks will fall no matter how much money is made available to the public, especially if financial assets are in bubble territory. This you see is the ‘clincher’ in terms of a possible bull trap in the making.

In this respect there are three pieces of technical evidence to support the case for a major top in stocks next month. The first of these is an anticipated Rydex Ratio bottom, seen below again for your convince. One should notice that within the array of possibilities stocks are seen pulling back over the next few weeks delaying the final thrust in RSI down to indicated support until next month. If this does not occur however, stocks could continue to blow off during October, creating a perfect inversion. (i.e. October should be a panic low, not the opposite.) What’s more, and in relation to precious metals shares, if a top occurs concurrent with the broads in either latter October or November, we will need be cognizant this opens the possibility of an interim turn lower taking place here as well. Such a thought process is also supported in the observation important turning points often occur in either November or May, where if we get a top in this timeframe then, precious metals could be dragged down by falling stock markets. And it all depends on whether speculators finally cover their short positions on the broad markets and don’t reopen them soon afterward. (See Figure 1)

The second piece of technical evidence comes from our analog comparisons to the 1937 top in stocks, with more specific reference being to the historical Dow set against the NASDAQ of today. In looking below then, one should notice that in order to repeat the Dow’s sequence from the 30’s, tech stocks should continue higher straight away. Thus, what happens this week will be very telling. Moreover, it should also be noted the Dow of the 30’s compares to the NASDAQ of today in the sense companies of innovation comprise both measures, making this discussion more relevant than you may have first considered. (See Figure 2)

And then there is the possible replication in pattern of a margin use blow-off in the works, where if the current sequence were to repeat that of 2000, then a second peak should be seen in November as well, approximately three months after the first. You see back in 2000, an initial margin use top was made in January as the Dow was out-performing, only to be followed three months later in March by both tech stocks and margin thresholds blowing off again into final crescendos. Is what we are witnessing now a repeat of this sequence? While nobody can ever say for sure, the possibility certainly exists as tech stocks have indeed been outperforming over the last three months. More on this below, as the Yen is telling us not to expect this for some time yet. (See Figure 3)

Add to all this measures of global growth are already as bubbly as they have ever been, with the Baltic Freight Index and Chinese stocks glaring examples in this regard. (See Figure 4 below for annotated SSEC chart.) Both gold and commodities are obviously benefiting from all this inflation, bringing to mind the possibility of the opposite occurring if economies begin to contract of course. Just take a look down the list attached here, where one does not need be particularly adept at reading charts to notice the tight correlations all equity groups have with the BDI. For this reason then, we remain watchful for a turn lower here that could come at any time. Perhaps Chinese stocks will lead the larger sequence however, who knows? (See Figure 4)

Of note as well is the observation speculators / hedgers are in fact not betting on downside in stocks after November as indicated by expressions of interest in CBOE Volatility Index (VIX) options, where open interest falls dramatically in December, but put / call ratios rise. (i.e. a rising put / cal ratio in the VIX would cause short squeezes here, just like this mechanism works on stocks.) What’s more, it should also be noted this signature is a perfect match in relation to the scenario our technical evidence presented above points. Of course short sellers, and particularly the public, will have to stop betting bearish in order for this to become a reality, or the possible prognosis Dave talks about in his latest analysis of the S&P 500 (SPX) will likely become a reality. Here, if short positions remain high (one should note they rose last week yet again) into the first quarter of next year, stocks could noodle around right through a ‘standard’ period of seasonal strength lasting into March, as with the outcome in the year 2000.

Impossible! I was thinking the same thing myself before I started to take a closer look at these next two charts. Afterwards however, I’m not so confident about the more near-term bearish case at all – at least not at the moment. Why? Quite simply, when your head (history and logic) is telling you one thing should be happening, but the tape says something different, it’s been my experience if one does not go with the flow, such a mistake could become very expensive. And this appears to be the case at present, with hyperinflation (more on this below) and a re-emergence of a full-blown mania in US stocks the culprits. In this regard, look how our chart of the VIX can be altered now to give the impression prices could continue to ride down a now emergent channel. And furthermore, notice that count wise prices could fall all the way back down to between the lows (12ish) and 15 before seeing a bottom if this is the case and not violate any wave related rules. (See Figure 5)

And then there is the Yen. Here, the message is if you thought people were beginning to find their senses with respect to carry-trade related activity and leverage in general, shake your head, step back, and give things another look, because the chart below is telling you this is not the case at all. No – the chart below is telling you just the opposite, meaning we have a long way to go yet before that wall is hit. Ergo, at a minimum, in breaking down out of the indicated triangle, the measured move (MM) must be respected; meaning a trip to 83 minimally should now be anticipated in coming weeks and months. Moreover, and as with the VIX, notice again how wave related rules are also not violated, where believe it or not, such a move would be considered ‘corrective’ in the larger scheme of things even though stock prices are being pushed to all time nominal highs. Stocks will not go to new highs in real terms, as I’m sure gold and commodity prices will inflate faster under such circumstances, but up they will go never the less, making shorting activities very expensive, even if just hedging related. As stated when the Short Portfolio was first put up, be very careful and go lightly, only hedging profitable long positions – not speculating. Now you can see why. This inflation thingy – it’s out of control. (See Figure 6)

This brings us to our next subject, that being the bullish disposition of the precious metals complex at present. Could it be any other way with the odor of hyperinflation in the air? In this respect wave related evidence (a shallow correction) and quite simply the buoyancy still evident despite the fact a correction is taking place are suggestive a very strong head of steam still exists in the boiler, and that conditions are set to propel prices far higher. This of course should not be surprising to our regular readers, as we just recently pulled back on our short-term bullish outlook in order to gauge underlying conditions once it appeared a correction was in order, with the prognosis now being ‘fire away’ once more as we are about to explode higher in my estimation. In this respect, I have updated the Chart Room to ensure you have a readily available tapestry of properly annotated pictures available at your disposal in addressing any doubts you may have in this regard.

Furthermore, I can’t find one picture I don’t like right now, so in spite of the fact more corrective price action may be on the way, it should continue to be shallow in nature, and viewed as accumulation opportunity. Naturally then, and with this in mind, we are now returning to a bullish disposition with respect to both our short and intermediate-term official views for the complex, where again, this means dips should be bought. You may be saying to yourself, yes, but what about when the dollar ($) corrects higher, won’t this cause a ‘larger’ correction in precious metals prices? While the answer to this question might be ‘yes’ at some point down the road, the current ‘blank check’ policy with respect to papering over problems around the world means all fiat regimes are in the ‘race to zero’, not just the $, and that precious metals prices will be rising in all currencies. One should note the $ is in rally mode as we speak and it’s having very little material effect on the gold price because of this. And it’s all happening so fast (and accelerating) that attempting to time things at such a juncture is more dangerous (in terms of opportunity cost) that not. This is of course the nature of hyperinflationary times.

So, buy those dips, as they may be a thing of the past very soon. Of course some would argue rising bond yields and deteriorating credit spreads are bound to have an effect on pricing at some point, and with this I will agree. However if the above charts of the VIX and Yen have any predictive value, these concerns should be put on the back burner for now, as there appears to be a great deal of money to be made in precious metals in coming months. This is why we are on our way up to Red Lake later this week, to scope out more opportunities that in my opinion still hold excellent value and offer above average return possibilities moving forward. In this respect it’s my opinion not only will well positioned junior / micro-cap opportunities be the place to be once the public begins to buy into the metals, but because the Red Lake area hosts some of the richest resource bearing rock in the world, extra premiums will be assigned top companies working in this area. What’s more, the fact this area is being actively explored and is located in Canada, a politically stable environment with private ownership laws strictly enforced, international funds will flow into these plays like you can’t believe in my opinion. As you may already know from recent commentary, currently my favorite Red Lake plays are Kings Bay Gold (KBG:TSX-V) and Grandview Gold (GVX:TSX), along with Rubicon (RBY:AMEX & RMX:TSX) as it has a vested interest in most of the properties worth mentioning in the area.

With this I must cut things a bit short today, but I will be back Thursday morning as usual with more on precious metals. And of course when I get back from Red Lake next week I will have lots of interesting insights to share in this respect as well. You should know I intend to concentrate on Northern Ontario, Canada in identifying small cap opportunities moving forward as we are far enough along the political risk curve to warrant such consideration. This is why the loonie is going through the roof you know? And it’s got much further to go because both institutions and individuals even in the States, Canada’s neighbor, have not bought into this realization yet.

But before I depart today, I would like to touch on subject matter discussed here before numerous times, where it’s a subject I like to expand on whenever possible because it’s complicated and requires elaborate explanation such that it could constitute a week’s worth of commentary on its own. This is of course not practical from my perspective in that other things must also be discussed, but every once in a while a capable soul like Adrian Ash comes along to help out in this department, with his latest an insightful examination of fractured money supply measures. Here, Adrian does an excellent job of breaking down why actual money supply growth rates are not being measured correctly, where numerous sources of new credit (money) does not make it on the books. And in going beyond this discourse, it’s not just private sector lending that doesn’t make it on the books. No – a great deal of government largesse also doesn’t make it into the money supply measures either due to dishonest accounting practices. That’s the government’s job now you know, to defraud the public in furtherance of its own agendas. The days of responsible government are long gone, and the days of hyperinflation are now with us, as reflected in the gold price and asset bubbles floating around.

Make no mistake about it – the government has nothing but contempt for the public, as evidenced in their views to claims against all of your property, including their self-declared right to confiscate your gold and silver bullion, shares, all of it.

Protect yourself – as one day you will surely wake up to a very different world if history is a good guide.

Good investing.

Captain Hook

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