This chart speaks to my prior post regarding the poor performance of the mining stocks relative to gold. This chart compares GDX versus Gold bullion. GDX is a proxy for the mining industry and is weighted most heavily by the larger and mid-cap mining issues. This chart would be far uglier if I were to compare the junior mining issues with bullion. As can be seen, the high water mark was back in 06. There has been a steady decline ever since in this ratio, indicating that the leverage is decreasing. This is the primary reason I have been looking to options on GLD and SLV to generate leverage as well as options on the miners themselves to boost leverage.
Jim Sinclair says leverage is going to 5:1 in favors of mining stocks. Jim has been right all along about this bull market, but time is not his strong suit. To be fair, he rarely offers a time prediction. To be right about price is a lot easier than to be right in time. Time is a sticky subject and is why I read Martin Armstrong. Armstrong's theories and analysis are always in time, with lesser emphasis on price. His predictions will specify highs and lows rather than specific prices, but with other technical analysis will render more specific price ranges.
Armstrong is saying that the stock market is not going to collapse in a deflationary crash as some think. If that is true, it is supportive of Sinclair's view. If the market falls into a deflationary crash like the mini crashes we have seen so far, only much worse, the mining stocks will get hammered just as bad or even worse.
The view Armstrong and Sinclair both espouse must be broadly described as inflationary and is in direct conflict with deflationists such as Prechter and Mish Shedlock. While I certainly agree that deflation is happening and will continue as debt is defaulted on, I feel both Shedlock and Prechter both miss a few important aspects regarding the debt based monetary system and gold.
Specifically, Prechter does not even consider the monetary qualities of gold. He sees gold as strictly a commodity, subject to price fluctuations introduced by monetary inflation or deflation. This is a major error in thinking. He completely discounts the lack of confidence issue with fiat currency. We have seen the power of this lately as gold has marched to its all time high on the back of a strengthening dollar. He has repeatedly called for gold to fall dramatically back to 400 dollar level. He has been totally wrong and will continue to be until he embraces gold as currency as well as commodity.
Both Shedlock and Prechter lack an over-arching philosophy as to why we have the system we do and what its purpose is. This is very simple to realize by the nature of their predictions regarding deflation. They believe that deflation will win in the end. In that process, currency will get more and more scarce, therefore more valuable. A more valuable currency is a stronger one, requiring less currency units to purchase a unit of goods or service, rendering lower prices. I agree with this view. Where I disagree is to the lengths that our government and Fed will go to prevent this from happening.
My view of our system as a debt pyramid, designed to enslave every single person on earth to the bond market, illustrates what is at stake if deflation is allowed to take over. If wholesale deflation is allowed to spread, massive debt default will result. After all, debt default is caused by excessive scarcity of money supply. If debt default spirals out of control, bond principal and interest goes to zero. The chains of economic slavery will be broken and the free lunch for bond holder ends. They will now have to earn their money like the rest of have to, by working for a living.
My view is that heaven and earth will be moved before they allow this to happen. Happen it must, and happen it will. But, not without a battle of mutual annihilation where our money is destroyed and the bond market collapses into a black hole. It is this process where gold has no limit to the up side and the dollar to the down side. Notional value in dollars of the stock market may set all time highs, along with all time highs for commodities. This in a nutshell is Armstrong and Sinclair's view and would explain how both suggest that higher stock prices are in the cards.
I believe the 5:1 leverage Sinclair speaks of is his view as to the power of the confidence factor. He believes that there will be a rush into gold and in short order physical gold will be impossible to come by for the average person, leaving the stock market as the only avenue available to gold. Most people are familiar with stocks and it will be the most natural thing to do to seek out the mining issues. Therefore, there will be a mad rush into one of the tiniest sectors of the overall market and a resulting bubble of epic proportions. That is leverage! I see the logic of this rationale, but I must say it is a tortuous path that we have to walk to get there
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