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The Gold Update by Mark Mead Baillie --- 304th Edition --- San Francisco --- 12 September 2015 (published each Saturday) --- www.deMeadville.com
“Gold Dead Ahead of the Fed”
The double entendre of the title is fitting, but in its more literal sense, lately the trade of Gold is as if 'tis been left for dead: narrow, discarded, lifeless, especially given the ramped-up volatility of stocks markets here, there and everywhere. We thus start straightaway with our two-panel graphic of "expected daily trading range" (EDTR) day-by-day from one year ago through yesterday (Friday) for both Gold on the left and the S&P 500 on the right. Again this is not market direction, rather 'tis a measure of volatility based upon measures of daily price range contraction (Gold) and expansion (S&P):
"Well, they're waiting on the Fed", they say. The Federal Reserve Bank seems but an irrelevancy, I say ... until they're next pressed back into Quantitative Easing, in turn then becoming very relevant for Gold. To be sure, what we view as an improbable increase this week in the cost for Fed Funds of +0.25%, once passed through the system, would be a budget-buster for many a variable debt-laden, on the ragged credit edge consumer out there. As the FinTimes put it this past week: "Turning point looms for US debt binge ... Flip side of cheap financing exposed as borrowers face test."
But honestly folks, were the Fed to raise its Funds rate, responsive gyrations notwithstanding, the economic effect of even just a one-time hike, (were they to actually so do), could appear comparably wee given the destruction of the currency's value over these last three decades. Indeed, one might go so far as to say that "what's really dead is the Fed". They're done, finis, El Toasto. Their creation of faux dough which in turn has generated geometric growth in debt and derivatives has this nation's financial assets, let alone those of the world, in foundationless levitation. The financial gravity of the globe was once a function of hard asset mass; today's floating about is a function of massless fluff. Perhaps we ought resurrect Sir Isaac Newton to come run the Fed:
As noted a week ago, in terms that the Fed ought "no-go", we saw such sentiment supported by the International Monetary Fund's Christine Lagarde. Now this past week, also joining the sanity of standing pat, we've World Bank chief economist Kaushik Basu alluding to "panic and turmoil" were the Fed to make its move: "...I don’t think the Fed lift-off itself is going to create a major crisis but it will cause some immediate turbulence..." No kiddin' Kaushik. The year's wildest week awaits us, (not to mention the balance of the next two months). Moreover, I like what prolific precious metals analyst Bill Holter queried a few days ago: "Will the Fed raise rates to 'save face' and try to stem the loss of credibility? Or will they remain 'patient' (cornered) and realize they cannot raise rates without razing the entire building?" Perfect.
Far from perfect, however, is the track of Gold these past four years. And with the football season now upon us, Gold reminds us of famed Minnesota Vikings' defensive end Jim Marshall, who in 1964 recovered a fumble against San Francisco here at Kezar Stadium -- and then ran 66 yards the wrong way to score a "safety" favouring the 49ers. Yet should the analogy hold going forward, 'tis a Gold Positive, for the Vikings nonetheless went on to win the game. But for now, here is the stifled state of Gold's weekly bars, the enveloping parabolic Short trend still in force, albeit approaching the length of the prior two stints of red dots, suggesting a flip to Long is near if not here:
"But if the Fed does hike, mmb, gold could really plunge..."
An illogical "if" there, Squire, but were they to so do, a spate of "panic shorting" wouldn't surprise us, followed by a spike back up upon cooler heads realizing that any rate hike is already right now well-priced into Gold at these ever so low levels.
Further, as we've been mulling over in recent missives toward determining if Gold's "bottom is in", this next graphic is enhanced towards underscoring the "when". Here we have Gold by the day since its All-Time Closing High of 1900 on 22 August 2011. The stack of price points in the chart's legend is the chronological sequence (from low to high) that ought tell us "when" the worst is passed. The first hurdle is the green line at 1155, which presently is the weekly parabolic flip price (from the above chart); then comes the blue line of the 300-day moving average; and finally are those two purple lines that form the 1240-1280 resistance zone: "when" that zone gets cleared and the 300-day moving average begins bending upward, we'll declare Gold as good to go. ('Course, given our expectations of Gold trading well up beyond that All-Time High, down here 'tis a wondrous buy):
Meanwhile, from the "Misery Loves Company Dept.", (as if you need be reminded), 'tisn't just the yellow metal on the skids as the following three-panel graphic of the last 21 trading days shows for Gold (left), the Bond (center) and the S&P (right). And specific to the "Baby Blues" of 21-day linear regression trend consistency curling higher for the S&P, the trendline itself remains down, (worth writing down):
In fact for the stock market, after rolling our eyes at Société Générale's saying last Monday that the U.S. stock selloff is overdone, we then read a piece referring to the market as having become crazy -- our immediate reaction being, no 'tis normal. What has been crazy is the correctionless past six years. And thus a tip of the cap to the ever-lucid Mohamed El-Erian who on Wednesday opined that higher market volatility is the new normal. Then ditto investment advisor Eric Nelson who on Thursday proclaimed that "This Stock Market Is Completely Normal". Darn right 'tis, and not soon enough. Welcome to real life.
Real as well is the tenuous support in the near-term trade of the Precious Metals. Below for the last 10 sessions are the Market Profiles (volume traded per price point) for Gold (left) and Silver (right), the coloured swaths being yesterday's ranges and the white bars the respective settles. Methinx 'twill all appear quite altered at this time a week hence:
Finally, with the Fed in the balance between now and then, here for the Federal Open Market Committee members are a few tidbits upon which to feast, indeed were their rate increased:
■ The sum of the monthly changes in the Producer Price Index year-to-date is -0.4%; like the aforementioned football player, that's running the wrong way from the +2.0% inflation target;
■ Emerging markets' interest rates can be hyper-sensitive to any Fed move, regardless of direction, and "up" would be "ouch";
■ China's been selling some of its Treasury holdings; refer again to the Bond panel shown above: the lower the price, the higher the yield; raise the rate: double the "ouch";
■ So the EuroZone's Q2 growth was revised up to +0.4% driven by a so-called "surge" in exports and consumer spending. Big Whup. You know the Euro Yo-Yo, and prices for produce in the Zone are plummeting: just look at the recent Brussels sprouting of protesting farmers.
■ Then of course the real gorilla that everyone sees in the room, but dares not mention given the purported 5.1% rate of StateSide unemployment, is the 38-year low of our labor participation rate. (Shuuush, don't say anything!)
Brace yourselves dear readers: Thrashin' Thursday is 'round the bend! Rate rise or otherwise, once all is settled in its stead, we'll find that Gold was never dead, for QE shall ultimately raise its head!