The Gold Update by Mark Mead Baillie --- 156th Edition --- 10 November 2012 (published each Saturday) --- www.deMeadville.com
A Joyous Celebration for Gold: Now on Go to 1800
Should I be wrong about this, I’ll look like a real Đick, (Morris that is, a little StateSide political humour there). Nonetheless, let’s go!
With respect to the specific underlined terminology used in The Gold Update of a week ago:
1) Tuesday was the celebratory Election.
2) Wednesday through Friday the “predictable” reflexion.
3) And now begins the thoughtful reflection.
‘Tis been our anticipation these many months that Gold at some point would sever its positive directional correlation with the S&P 500. It looks right now that we’re standing on a threshold of Gold Breaking Away as, per that link, has been its periodic wont on numerous multi-month occasions since 2001. The rationale for this phenomenon to kick in has been firmly in place for quite some time. However: as we drew ever closer to the Election, it seemed that any such viable parting of Gold up and away from a declining S&P was, dare I say, “purposefully” being put on hold until President Obama became assured of a second term, (immediately at which point, were you watching the futures Tuesday evening, you saw Gold shoot up and the S&P tank, thus commencing the reflexion that you’ll see charted herein).
Clearly without being able to provably cite any entity, we’d nevertheless curiously put forth the notion that the S&P’s continually rising into an evermore expensive level of valuation given the recessive growth of earnings -- by our count here of some 2000 companies each quarter, ‘tis not been since Q4 of 2010 that the percentage of higher year-over-year quarterly earnings has increased -- was due to artificial support. (Example: a discreet electronic trading hot room in an undisclosed location solely employed for the purposeful periodic purchase of just enough S&P futures such as to trigger programmed stock buying on the exchanges, thereby preventing any reasonable correction). Then as noted, from the instant the Election result was known on Tuesday, the position unwinding began.
Oh how overdue has been the S&P for a fall! You may recall from a mid-October missive the chart that showed the S&P as having been down 27 points month-over-month, with its moneyflow instead suggesting it “ought have been” down some 205 points. Now upon reflection, we hadn’t yet reached the Election.
Gold on the other hand is doing just fine, and rightly so. After having successfully hoovered the Forces of Resistance across The Northern Front (1750-1800) only to then slip back to the upper 1600s, expectedly so as the linear regression uptrend ran out of puff, such tide is now turning back to the upside. To be sure, Gold’s weekly parabolic trend is currently Short, but as you know, we’ve not given it much shrift, (i.e. a short-lived Short trend). And justifiably so: from America to Europe to Asia the accommodative monetary presses have been humming along through much of 2012, in turn increasing the global supply of M2, which in furtherance “naturally” commands a higher price for Gold. (And worry not, you Gold bears out there: stay fixated on that rising M2 and when you see it decrease, Short!).
With Tuesday’s decision now behind us, I again put forth the notion of the next episode of Gold Breaking Away to commence sometime between post-Election and the end of Q1. And it now appears there’s no time like the present to get this started. As a word of caution, one ought bear in mind that nothing moves in a straight line: yes the S&P, arguably “artificially” as high as it got this year (1474), is now receiving its due “comedownance” as it seems to be finally responding to the aforementioned observations of lackluster earnings growth, negative moneyflow, (and faux economic data?). However: by classical textbook technical measures, the S&P has actually been “oversold” from as far back as some three weeks ago when it broke below the 1430s, coincident with the Incumbent’s Challenger gaining momentum, (go figure). The Index is thus due for the proverbial “dead-cat bounce” and should the S&P’s directional correlation truly be turning from positive to negative with Gold, then in theory, the latter would be met with selling as stock market rises. Having said that however, in a pronounced multi-month move up and away from the S&P, Gold really doesn’t give a derrière du rat what the stock market is directionally doing.
As for the near-imminent increase in rates of taxation, and moreover the planned decrease in public sector spending, (really? ... certainly ‘twill be so in the private sector…), I shan’t be surprised if “they” let us go “forward” and right over the “fiscal cliff” before really attempting to do anything about it…
…in which case the following parabolic Short trend, (barring a deflationary depression), won’t be around anymore as we check the current stance of Gold’s weekly bars:
This current parabolic Short trend is the 25th one since 2001: five of them have lasted five weeks or less and this latest one thus far of two weeks duration, (per the two declining red dots), may well fall into that short-lived category. A few mild down days notwithstanding, here at 1731 it “feels” at the moment like “1800 before 1700”. And “feelings” are apparently the “in thing” now, for as losing political strategist and pollster Frank Luntz bluntly put it post-Election: “America no longer votes what it thinks, it votes what it feels”.
So now we’ve Gold all aflutter as it revels in that which surely is to increase over the foreseeable future (global M2), rallying in the face of a strengthening Dollar Index as further erosive events and issues from Across the Pond have eschewed any love for the Euro in its posting a third consecutive losing week. And as we next view this graphic of the “election reflexion”, a four-day, (albeit hardly correlative), up run for both Gold and the Dollar is hardly threatening for the yellow metal…
…for as you may recall back in 2010, they both rose fairly concurrently for six months.
Back to the Valuation Line … and Pending Penetration
Here since August is Gold and its smooth pearly valuation line as concocted from relative price changes in the BEGOS markets complex (Bond/Euro/Gold/Oil/S&P):
From which we come to that rule of thumb: upon Gold’s price penetrating the smooth line to the upside, for the trader, the Long side is the right side. The one negative in the chart is the smooth line’s recent rolling over. This is due in part to Gold’s having been best recently correlated within the BEGOS group to the Euro and secondly so to Oil, both of which have been weakening of late. However as noted earlier, when Gold goes, regardless of the attendant markets around it, it goes! And I shan’t think this momentous strength we’re having in Gold post-Election is just going to suddenly stop. Again, even if Gold has a few down days, I anticipate more buyers coming to the fore through here, (and the smooth line above, in due course, sorting itself out by curving upward). Which brings us to…
Well there they go, what? Our Baby Blues did not reside for very long across the floor of the following 21-day chart, as the back of the linear regression downtrend is now being broken. Technically, the trend as denoted by the diagonal line remains down, however its steepness is abating as the baby blue dots rise, with price already well on the up move:
“But mmb, if Gold suddenly goes back down, won’t the dots just flop over again?”
Of course, Squire. It has certainly happened before to Gold as well as for the other BEGOS components. But here’s a treat: I am going to now take you deep inside the rarely seen analytic chambers of our computerization facilities here at de Meadville and show to you a year’s array of the dots that make up the Baby Blues. To wit, the following graphic extends from exactly one year ago to date (252 trading days ... and as the chart is normally for guarded internal use only, it lacks the neon aesthetics of the one above). The price of Gold at some of the major turns is as noted:
“Gosh mmb, that’s amazing!”
Indeed ‘tis, Squire. Just don’t tell anybody.
We’ll close out this week’s missive by again bringing up Gold’s trading profile, the current 1731 level as denoted in red. Clearly Gold from a week ago at 1678 has swiftly cleared that large wedge of resistance in the middle. Now the key going forward, indeed perhaps en route to 1800, is to stay above it:
Lots of economic tests for the markets to weather in the ensuing week. Can you say “volatility”?
Right. (What a guy…)