Gold Tells All

By way of analogy the current rally in Gold stocks looks a bit early. Even after the 2016 January rally put in an interim high the index lost another 20% before it finally turned higher. Peak to trough Oct to Jan the GDX lost over 30%. One trader commented after this weeks swoon in the equity markets, that the rotation into gold was really money that “wanted” to go into stocks. Right now I am buying that with a caveat. The money that wants to go into stocks is going to disappear when the system closes up.  I want to suggest that what would take 30% out of the gold stock market is not something your 401K will like. 

The current downdraft in the S&P is about 5%.  Perhaps this won’t be as bad, but something happened in 2016, I call it the crash that never happened, the silent heart attack. I don’t why, but the selloff never materialized into bear market status. Is this time different?

But let’s skip the boilerplate the stuff you already know, and try to sketch a few outcomes. The massive global liquidity bubble is not going anywhere. Doug Noland hinted at it last week in his CCB, Contemporary Finance’s Defect. 

 It amounted to the greatest transformation in financial and market structure in history, all backstopped by the “activist” Federal Reserve and global central bankers. It was a New Era – a New Paradigm – that worked miraculously until its 2008 malfunction risked bringing down the global financial system. Most importantly, this incredible system of ever-expanding speculative leverage, seemingly endless liquidity and powerful asset Bubbles has a fundamental Defect: it doesn’t function in reverse (with deleveraging). Yet rather than addressing what went so terribly wrong in 2008, global central banks resuscitated and then bolstered this deviant financial apparatus, sending it on its merry way to reflate global markets and economies.

Let that sink in. You can’t DELEVERAGE this liquidity bubble. What happens when the system freezes? The Central Banks rush in with new liquidity and rules to prevent mark to market accounting. The market resumes it’s previous course.  We got through the 2016 problem with a mix of easy money global policies which created this bubble. Achieving that level of cooperation this time will be more difficult, while the IMF is doing its part, the abundance of EM dollar denominated debt is a problem. How does it happen we allow small countries with shaky economies to issue debt denominated in OUR money, compromising the dollars solid financial foundation. They then must enter the market to buy dollars to service that debt and the cost is rising you see?

For years we sold 30 year Treasury bonds like they were currency through the BIS to solve our trade deficit. Bernanke called the process “sterilization.” These bonds were money reserves, but foreign buyers who wanted US products could never recycle those reserves causing inflation in US assets. Then the real estate market bubble returned when Chinese nationals with cash started buying US and Canadian real estate. Officially China put limits, or restrictions on capital flight. Inflation in the US puts upward pressure on bond yields and makes the bonds that China is holding in reserve worth “less.” Then China and Russia started dumping their US bonds in the secondary market. They reduced their reserves, the regulations on capital flight then become an after thought. US assets, including stocks are the beneficiary. We became a hot money destination.

The Fed chief says many things, few of them true. The Fed raises rates in order to attract foreign buyers of US bonds to fund our gargantuan deficits, and preserve the value of the dollar for those who have to exchange their currency in order to buy US bonds, assuming they don’t run a trade surplus.  Most of the bonds currently being issued are being purchased by US investors and institutions. While foreign bond buyers pull back from new bond purchases, money comes out of stocks as well. Borrow from Peter to pay Paul. Liquidity shrinks at the margin, causing a crisis, but the stuff underneath us is massive, global monetary excess funds in the aggregate never vanishes.

The matter is never resolved. The system freezes up, we unstick it, and each time more liquidity is left over because that money never really disappears. There is of course a shortage of US products for export, if we had these products to sell inflation would return. We may soon see a return of US manufacturing. Beyond the moment when the car sinks into the lake, what happens? Massive inflation?? More to come….

 

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Faux Rally? or Fall Rally in Gold

There are conflicting forces at work here. First off is the bullish divergence in RSI, which bottomed ahead of the bottom in the stock. Good. Then there is the matter of the gaps, including the smaller gap below the gap at 19.50. The small gap closed, which is good, but it took some time, nearly two weeks and then the support line was less than solid. More importantly the test of the upper gap was a failure in itself. The stock failed to touch the gap the last two attempts. Think of this test of support and resistance, gaps, like a bunch of Huns banging on the gate. Only in this instance the good guys are scared to climb into the parapet. Study my gold 1200 chart to see that the bear is winning that one. The white knight showed up yesterday, and we have to see if that sticks.

Notice how carefully the 50ma was manicuring the stock price, and the price was pulling back, even from that descending line. You have to think this rally has no guts. I go back to the seasonals, and on that account this rally is still early.  My own inner feeling is that if stocks continue to selloff there will be more selling in the gold stocks and gold. It was the all in one market for a long time, probably still is. There is really no place to hide, even interest rates may not provide a contrary way to prevent the carnage. Maybe we all just have to eat our pound of dirt. I don’t like to see the bulls get off that easily, but such is life.

I put on some at the money puts on this trading around a position. My take on the S&P is a bit clearer, and what I do depends on how things evolve, the time frame mostly. More on that.

 

GOLD vs the minors

In a previous I added the caveat that the trade in Gold depends on market stability. Now here is the other side. The ratio of Gold and the miners, shows that in periods of recent market instability, that Gold is sought as a safe haven and the miners become an afterthought. Gold and the producers tracks pretty evenly right up until the stock market crash which bottomed in 2003. And while both gold and the miners started a new bull market they both did rise in unison, For eight years at least the two flowed together in a narrow range.  Then the financial crisis, (note not a market event though it quickly became one, but a problem at the core of the integrity of finance and money) Hence from that moment on the writing was on the wall, fiat left a bad taste and Gold climbed, higher than the producers until 2016 when sanity returned briefly to the sector. Fiat is still the turd in the punch bowl, and has been for ten years. Gold is telling you the story. Now Gold is beginning to climb relative to production in anticipation of another crisis. If you overlay the 2008 ratio rise in Gold you might suppose the ratio could go to to 50-1 !!

I use the XAU because the GDX is too young to remember.

Predicated on a lack of market stability you would prefer the underlying to the producers during this phase.

I also follow the ratio of the XAU to the Dow, which demonstrates that the group is a leading indicator of market action. It is currently near 2016 lows, and 2016 was the crash that never happened, a silent heart attack as it was. My only explanation is the massive amount of global liquidity overwhelmed the bear market in equities, prompting then Fed chief Yellen to posit, “Not in my lifetime..”

 

update 10/11 : The Gold to Silver ratio is higher, while the Gold to XAU is lower, though still well into launch. 1200 remains the benchmark. The gold stocks might pullback from here, while Gold remains flatish, though if money goes back into stocks (we are at the 200ma in the S&P, a level the retail investors would like to defend, and because it was tested without so much as a boy howdy. Should 200ma break it might not mean much, if THEY can pull it back. This market runs on global liquidity and matters like  technical levels are often a distraction. The rise in yields took a breather today, should they rocket up, then real trouble lies ahead. It may be that the dollar will fall or will be pushed from its perch, which gives Gold more fuel. 

Silver and Gold

The analysts see the Gold Silver ratio is at historical highs, which as I say doesn’t mean that new highs are not possible, or unlikely. First thing lets flip this to Silver:Gold because it is Silver we are interested in here. Here’s the chart since 1990 which is enough time to get a back of the napkin look at how it has worked so far.  When the stock market is going up the Silver to Gold ratio goes higher, and when the stock market falters, Silver loses value relative to Gold, except of course for recently. This stock market rally is predicated on massive financial distortions.

When the ratio goes up Silver goes up and when the ratio falls, Silver falls, that much seems to be in our favor, because any ratio assessment allows for four outcomes, and should Silver gain value faster than Gold while both are losing value we gain nothing, unless we want to short Gold.

The point that Gold is at historical highs relative to Silver ignores a couple points. One exactly what is the mean to reversion here? I say probably .016 which frankly is not much higher than we are now. Do you expect a market rally? Is Silver price rising? We already had a stock market rally. If the market sells off and we have a recession we have the 91 period by example to give impetus to the notion that the ratio has lower objectives, perhaps making new historical lows. Is $5 Silver in the future, that would really take the wind out of the buy the Silver ratio to Gold when it’s this low! And paradoxically PMs tend to lose value along with everything else in major market downturns. The drop during the bear market in the early 2000s doesn’t seem like much but it is.

In line with my thinking about physical PMs, the moment of optimal price may mean the lack of opportunity or supply. Any purchase of physical silver I make will be coupled to a paper short. This trade is like the guy who keeps hitting the Don’t Pass Line at the crap table, he has no friends (except maybe the landlord).

 

Gold Traders Update

I have read so much stuff on the blogs about PM’s, how to trade it, it’s always in a bull market, when it gets cheap you must buy it, when it gets expensive, buy more. I have my Manifesto on Gold which I will post, it’s not your usual stuff.  When you buy gold, or anything, you don’t want to pay too much.

Gold trading recommendations aren’t often worth a lot and maybe mine as well. Everyone seems to be ignoring the seasonal trade in gold SINCE THE HIGH IN 2011. 

The counter rallies since 2011 follow a seasonal pattern. If it repeats itself I consider it ‘actionable’. It’s what I will be doing anyway. The setup requires general market stability. More in the Manifesto.

You want to buy something you can put in your pocket and that will appreciate in value, although losing value relative to the dollar is not the same thing as losing value (see Manifesto). You want to buy something that grows in value relative to the coin of the realm. Such things are often called “Investments”.

Now you can trade gold through the GLD or through gold mining stocks, which are very different. More on that later. There are leveraged plays on the gold mining stocks, NUGT (nugget) and DUST (dust). NUGT is the 3X Bullish index on the mining stocks and DUST is the 3X Bearish index.

The (greed based) thinking on this goes you can make a lot of money speculating on a big move either way. In truth these things are just as good at amplifying small moves which are more predictable. If your timing is right you can do really well for yourself.

There are leveraged plays on the commodity as well, but simple options plays on the price of the commodity, held as tradeable securities, the GLD and SLV (Silver) are just as good. There is also the futures market which is far more volatile.  Whether you play the underlying or the stocks in the mining companies, it makes a lot of difference, as sometimes one outperforms the other.

For those who want the technical analysis I will post my chart on Gold 1200

Lines or support and resistance occasionally fall inside the trading range of a stock or commodity. Such is the case here. Right now Gold is pinned to the 1200 level and probably won’t reveal the direction of the next move for a month or so. I nailed this one, but what do you do with it? At least I wasn’t buying someone else’s advice.

I do expect a small rise, before a larger fall , leading to a bottom in December and a January rally. Gold could go for an early run. A geopolitical event could ignite buying, and on the other hand Turkey just sold $30B in gold to prop up it’s currency, which is end of the world insanity in my view. Their selling has had little effect on the gold market, because central banks do not sell retail, or through the commodity exchanges. Hence you sometimes get a disconnect (check my Manifesto)

At the moment I have no leveraged plays, if you are a positioned player you often trade around positions, and I have a small put option position against some stocks I own. I have also been low bidding some put options on Silver, I want them but I don’t want them real bad. I expect SLV to revert to the 13.25 level which is about  a 3 or 4% drop. All that in the manner of normal market movement has some potential. The price ratio of Gold to Silver is a point of consternation for many Silver owners. I look at 80 and say yes that’s an historical high, and it might just as well go to 100.

The gold to gold mining stocks ratio on the other hand has the potential to lift the miners 17% or more relative to the price of gold on a reversion to trend. I have a close eye on that. If they are both losing value that sort of ratio unwind is useless.

Stay tuned more to come