The Gold Update by Mark Mead Baillie --- 161st Edition --- 15 December 2012 (published each Saturday) --- www.deMeadville.com


"Short Everything (?), 'Cept Gold..."

Two missives ago, ‘twas all about “Gold is hot.” That certainly still is the case as trading volume continues to churn like crazy. Then a week ago, ‘twas all about “Gold buyers are busy.” Again, given the strong volume, they remain very busy, for if they weren’t, Gold in the current corrective phase would be well down into the mid-1600’s rather than here at 1698. In addition to all that, what have we now? An outbreak of “question, question, question.” No less then three times since last week’s writing have I been asked in person, whilst scampering about this once great city of San Francisco, the exact same question: “How many points down is gold going to go?” Thrice startled by the dubiety of such inquiry, I sincerely replied in each instance: “I didn’t know it was going to.”

Bad form, I realize, to end such heartfelt response with a preposition, but I like the way it leaves hanging in the air an elicitation of hope, and moreover, logic. For unless one has gone to ground in an effort to escape the potential ending of the world this next Friday, ‘twould be hard to have missed the FOMC’s announcement on Wednesday of QE 3.5 which could be in vogue for some two-to-three years, (perhaps with even more revisions along the way, despite say they “nay”). Greece, too, can be tossed into the fiat froth as they are now poised to receive a further €49.1 billion worth of bailout funds from the European Financial Stability Facility, (rolls off the tongue with a requisite degree of ability).

Of course, the sustenance here for Gold is that the global supply of magic money, as ever, is on the increase and thus the broad-based outlook for Gold remains ever-positive. Courtesy of Bloomberg, the following chart’s bars represent the monthly year-over-year percentage growth in such global money supply as measured by M2 from 1998 through 2011. I’ve thereon superimposed the price of Gold as indicated by the dark line, extended to date for 2012, (which is why it exceeds the right margin of the chart). Clearly in the broadest sense, we again see that as the global supply of money increases, the price of Gold naturally adjusts upward:

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Yes, in a nearer time-frame sense, Gold remains both in linear regression and parabolic down trends, each of which are relatively mild, along with other more commonly-observed technical measures citing that our metal is currently more in ebb mode than that of flow. Which gets me back to the aforementioned outbreak of “question, question, question” as follows.

When Gold has a materially negative daily change, (the illusion), it really puts folks on the defensive with any regard to actual price, (the truth), being lost in the shuffle. ‘Tis annoying that such focus seems perpetually on the illusion, rather than on the truth, propelling amok the question of “How many points down is gold going to go?” Chalk it up to our having become conditioned by the way the FinMedia and its mainstream mothership report on the markets to us. Nothing drives me bats more than when the woman on the car radio says “Wall Street closed up 15 … this is CBS News.” Indeed, I ‘C’ that it is ‘BS’. Obviously, one assumes by ‘the market’ they mean ‘The Dow’, but without knowing The Price, to me The Change means nothing, (let alone then being able to do the mental math to guesstimate the closing price of the S&P, which for you WestPalmBeachers down there is very roughly the Dow divided by 9).

The point is that folks get a bit jumpy when they see Gold making a double-digit daily decline. I’ve a great friend and analytical colleague who, on any day wherein the yellow metal is down intra-session by more than 20 points, will -- with the veritable expectant precision of the Swiss railway network -- send me an e-mail declaring that Gold is doomed. (Yet on days that ‘tis up 20 or more points? No e-mail). Anyway, at the end of any day, don’t lose sight of the big picture for Gold, especially as described in the opening chart with respect to money supply growth. Like the man on a Gold radio-advert says: “I like to buy Gold when it goes down, and then after I buy it, I hope it goes down even more because it’s like having an insurance policy with declining premiums.” Exactly right. Pile on the Gold Express.

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Now on to the week just past, and despite its volume being the second highest in the last five, that all so perilous Change was another yawner, Gold finishing down eight points as noted at the Price of 1698:

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Four of the last six weeks have been down, the average change of those decliners being -18 points. The average change of the two up weeks? +45 points. Don’t tell me the buyers aren’t busy. Meanwhile, with Gold’s 300-day moving average continuing to hover around 1673, this overall pattern of consolidation continues to look remarkably similar to that which we saw coming out of the Black Swan Event in 2008:

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To be sure, if the above chart was instead that of a commodity or a stock, I certainly wouldn’t call it “a buy”. Fortunately, ‘tis of money, and as long as those faux dough growth bars we saw at the outset in the Bloomberg chart remain on the positive side of the ledger, Gold naturally shall proceed higher of its own accord.

Next, I again bring up the three-month valuation chart as the smooth pearly line continues to maintain a positive tilt:

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Regular readers know that the smooth line is an imputed price for Gold based on its ever-flexing relationship with those markets that make up the BEGOS complex (Bond/Euro/Gold/Oil/S&P). Gold itself travels more swiftly than does the smooth line, so for the trader, once price penetrates back above that line, (or the zero line in the chart’s oscillator), the Long side is the right side. (The new website, dare I again threaten is really coming, shall update this chart every day). Of course for the Gold investor as periodically noted, the Long side is always the right side, at least until it becomes over-owned. Yes, ‘tis said that only five percent of managed portfolios in the US have Gold exposure in one form or another. But I read somewhere this past week that globally, ‘tis a mere one percent. Where would Gold be if that increased to two percent…

Got Yer Shorts On (?)
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A week ago we noted that Silver had issued a Short signal, (basis 32.880 or better), based on its linear regression trend beginning to lose upside consistency. Now at 32.370, that position is, for the moment, profitable. Other similarly-triggered Short signals were since fired off mid-week for the Euro and Swiss Franc, however both to this juncture are in the loss column. (I only mention this because we’re suddenly getting linear regression signals to Short practically everything except for the Bond and Gold).

These are very aggressive, high-risk contra-trend signals -- typically the most dangerous in all of trading -- but nonetheless interesting to point out. For if one can manage the adversity, which often comes early in the typically multi-week timeframes of such positions, when they favourably finally go, they really go! Follows are two more such Short signals that came into Friday’s (yesterday’s) close. The dots we dub the “Baby Blues” are a measure of 21-day linear regression trend consistency. When the dots begin to keel over from a level of above +80%, the rule of thumb is to get Short with protective stops above the most recent peaks. Yer own yer own with these gutty signals, but here are both Copper and the S&P futures for the last 21 trading days with their Baby Blues beginning to roll over:

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Indeed, the market in particular that worries me the most is the S&P. Blame it on Apple, but over the last 63 trading days, (one quarter’s worth of trading), as the following chart shows, the S&P is down only some 50 points, but its attendant moneyflow -- which is regressed into S&P points -- suggests it instead ought be down about 400 points...

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…which instead of at the current 1414 level would rather be 1052. Such large divergence of moneyflow away from the S&P generally leads the latter, which in this case would be lower. So, should that will out and Gold continue as we’ve seen of late to trade more contra to the direction of the S&P than with it, we’ll have many a happy Gold camper out there. Barring an imminent resolution to our “Fiscal Cliff”, I’m anticipating a down week for the S&P and a positive one for Gold. And perhaps well beyond that of simply one week.

For the moment, here’s how Gold stacks up:

Gold’s All-Time High: 1923 (06 September 2011)
The Gateway to 2000: 1900+
The Final Frontier: 1800-1900
The Weekly Parabolic: 1771
The Northern Front: 1750-1800
Structural Resistance: (nothing stark as the picture evolves)
Trading Resistance: 1711 / 1715 / 1718
Gold Currently: 1698
Trading Support: right here at 1698
The 300-day Moving Average: 1673
Structural Support: 1672 / 1642 / 1577
The Floor: 1579-1466


Next week’s calendar of incoming economic data posts 23 scheduled items. But then come Friday, we’ve the end of the Mayan calendar, by which let me just say, if none of us are around in a week’s time, ‘tis been blast writing for you!

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Cheers!

…m…
www.deMeadville.com
www.TheGoldUpdate.com

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