Metals, miners and interest rates and banking crises...

The current thinking on metals is that Q 2011 was the top of a 5th wave which means that we should expect a massive a-b-c pullback.  The common wisdom, including that from the experts at EWI, says that 4 of A down is either complete (meaning that wave 5 down has already begun) or will be complete with a metals rally to finish off E of 4.  In the gold chart, it looks like the model from this post.  That model, which you can access directly here brings into play the concept of the wildcard count which I want to expand upon more today in this post.

I know that one of the biggest mistakes a trader can make is to get caught up in dogma.  The markets are fluid, dogma is not.  In fact, I think that my wildebeests herd and crocodile analogy is spot on: the herd wants to cross the river but if it sees snapping jaws of expectation waiting to take the whole herd down if the move is made into the water then the herd, in the interest of its own self preservation, will find another spot to cross.   That's why I have to get skeptical if not outright nervous if the whole market thinks a certain way.

I'm beginning to wonder if precious metals are going to take the wildcard path suggested in the post linked to above.  There are many reasons for this:

• The wave count for the metals leader, gold, is not clear.  It is meandering as if the herd is in an indecisive state.  What should have been a move above the upper rail for a throwover E of 4 instead short stroked and is now in no man's land.  That could mean that lots of snapping jaws were noted in the water and that the herd is reconsidering its options.
• I've noted recently in these pages that metals now seem to be trading in opposition to the broader markets.  I think the broader markets might have peaked and so perhaps metals are at a low.
• The price of metals is at or below the cost of production for many juniors.  More importantly, if wave A of the metals pullback ends at $1k on gold as EWI suggests then wave C will be $700.  That will cause massive BK in the mining sector at a time when China has joined India as a gold hoarder.   Nothing is impossible but somehow these two things do not jibe.
• The interest rate chart suggests that we could be entering a 3rd wave up. Keep in mind that the US fed plans to end stimulus by the end of October.  They now have two options: lose face by backtracking on that broadly communicated plan or follow through and then see how the markets react.  Since the whole thing is a con game, confidence of Mark and Patsy is of primary importance.  Thus, the fed will do what it thinks will engender the most confidence in itself.  I think that means they have to stop the stimulus, especially with worries about public unrest/income inequality/pitchfork revolution becoming more mainstream.  If the fed stops stimulus, someone will have to step up bond purchases in their stead.  Right now, a mystery buyer in Belgium seems to be filling the hole as the fed backs out of the position as the only buyer of treasuries.  Of course, everyone views that as a front and so one way or the other the Belgium buying will have to stop pretty soon.  If there is a rapid reduction in treasury buyers, rates could move up quickly.  As in 3rd wave type quickly.  This possibility is modeled below.  After years of falling rates, the down-sloping trend line has been broken out and now seems to be getting back-tested from above.  The odds favor a 3rd wave breakout as long as that orange trend line holds support.  Higher interest rates will assist in a global financial system meltdown since all of it is based on debt and higher rates make debt less affordable.  Asset sales will result (including many that happen as a result of BK by leveraged financials).

Rising interest rates can also fuel speculation about inflation.  Metals are the inflation hedge of choice in an inflationary recession because other hard assets such as commercial real estate, etc. which sell at Ponzi credit pumped priced are not a good option in a recession/greater depression. More on that below.

• Euroland is now punishing banks with "excess un-lent reserves" by charging them 0.2%.
• Mish is getting louder and more forceful about the expanding likelihood of a global banking melt down.  Keep in mind that Mish is not the emotional type.  He is VERY data driven.  When he begins to make such strong statements as "The global financial system is certain to face a full blown banking crisis. We don't know when there will be a global banking crisis and how it will play out, but it is certain there will be one."... With the Fed, ECB, Bank of Japan, Bank of China, Bank of England, and virtually every central bank on the planet all engaged in emergency tactics of some sort, with loans made that cannot possibly be paid back, with Japan off the deep-end in Abenomics, with covenant-lite junk bonds again on the rampage in the US and starting to gear up in Europe, with derivatives and unfunded liabilities in the trillions of dollars, and with the ECB recklessly pursuing ways to stimulate lending amidst major structural flaws with the euro, how the hell can there not be a global financial crisis of some sort?" then it is very wise not to ignore him.  Where can wealth go to hide and weather a global banking crisis storm?  There really is only one safe haven at such a time and that is metals.

 
So with all of this logic, let's go to the charts to see what a wildcard or "fat tail" model could look like.  Since silver is the more volatile of the two main precious metals, I think it is a good place to go looking for the wild card.

With this mindset I must say that the following potential wave model popped out at me almost immediately.   Note that a bit more of southing by silver could lead to a throw under on a falling wedge and, as pointed out many times in these pages over the past year, wedges have usually been 3s or Cs.  But after that, the potential for a massive, massive rally exists whereby silver could skyrocket to my long stated target of $75 or more, in fact, to perhaps $100 to meet the upper rail of the expanding wedge.  Let me tell you this right now: when I hold a 1 ozt silver coin in my hand right now I KNOW DAMNED WELL that it is worth more than today's approximate Monex price of $20.50 (in lots of 100 coins).  Prices can always go lower but I think that today's price for silver bullion coins represents good value nonetheless when you consider the energy, equipment, time, effort, risk and bureaucratic hurdles to producing it.

Zooming in, just a few more ticks down and the 5 wave rail bump would be complete.  It could also fail the 5th here leaving a nice inclining double bottom.

If this really is the 5th of an ending diagonal, it should be a 3 wave move which could be something like a-b-c below.   A throwunder of the lower orange rail followed by a break back up into the channel would be a strong signal that a significant bottom is in for M+M.  One safe wave to play would be to just wait for the breakout of the blue line.  If that were to happen, hold above it, sell below it.

One final note.  Despite having called the major top in silver and gold a few years back, I did not sell my gold and silver coins.  I knew that the dollar based prices would likely be pulling back near term but yet I left my entire retirement savings in physical gold and silver coins.  Although the prices of them have fallen from the peak, I did not buy any of them at the peak so I am still well above water on the net pile.  But even if it goes negative I will not regret the decision because I know that the super nova economy will grow brighter and then dimmer in succession until the inflation/deflation pressures no longer can equalize each other.  At some point we will either have a massive deflationary depression or a Zimbabwe style hyperinflation.  Long terms goldilocks outcomes are never possible in a Ponzi scheme! 

So if metals take a huge dip below my original buy prices then I will load up on even more because I still have many years until my retirement and the global monetary system is soon going to be having droves of US and Japanese boomers pulling their money out to live on instead of dumping more capital into the system.  It's guaranteed to all go bust at some point and when that happens, gold and silver will be the only money that matters.  This is why I don't speculate with my retirement savings metals, trying to time strength and weakness of the dollar.  Anything I have in the markets right now is not retirement savings, it is speculation cash.

One more thing.  If there ever comes a time when gold and silver don't matter then the only thing that will truly matter is how much lead and gunpowder you own.