The Gold Update by Mark Mead Baillie --- 157th Edition --- 17 November 2012 (published each Saturday) ---

Gold vs. the S&P: "We have separation..."

 I awoke Friday morning to be greeted with this “item” at one of the mainstream financial market websites: “Gold futures dip to extend losses”. Quick as a wit, I checked my bearings to discover that all was right with Gold: at 1709, ‘twas still up better than 2% in less than two weeks’ time from November’s month-to-date low of 1673. So what’s all the hubbub, Bub? To quote from last week’s missive: “…even if Gold has a few down days, I anticipate more buyers coming to the fore through here…”

Yes, the World Gold Council reported this week that global demand for the yellow metal weakened in the third quarter. Of course, we generally know that the production of Gold increases its supply typically by 1% to 2% each year, (some portion of which gets chewed up via industrial usage). And therefore as we’ve noted in the past, this suggests the physical amount of Gold in the world doesn’t materially vary from year to year. Farmer John may raise too many live hogs (commodity) and thus be forced to reduce his prices so as maintain a requisite demand for his wieners. But whether it be a reduction in purchases by China, or less infusion into jewelry, should Gold’s demand show to have weakened year-over-year, it does ~not~ mean there is more Gold (money) just idly sitting around; rather, its frequency of changing hands has been reduced. And yet, the global supply of M2 as measured in faux Fed Notes and accounts since 1998 has increased at an approximate compound rate of some 15% per year. ‘Tis that upon which to remain focused, for it suggests Gold ought already be north of $2000/oz., (given a closing price in 1998 of $289/oz.).

In fact as I see it right now, Gold is doing an outstanding job given that three of our most prized trend measures remain down. Let’s assess them.

First Trend Measure: We begin with our usual view of the weekly Gold bars, and per the declining red dots, we’ve now three weeks of parabolic Short trend in the books. What’s more, do you realize that Gold has recorded five down weeks in the last six? It certainly doesn’t feel like that whatsoever. In fact, the media along with the usual assortment of negative-on-Gold nattering nabobs are not coming to the fore as is their usual wont. But then I forget: they’re focused on Twinkies. Personally, I’d be focused on hogging up on Gold:


Second Trend Measure: As we next go to the three-month Valuation view of Gold, you’ll recall from a week ago our only concern there being that the smooth pearly line, (a suggested level for Gold given its price changes relative to those of the markets that make up the complex we call BEGOS: Bond/Euro/Gold/Oil/S&P), was beginning to rollover. Because Gold itself moves faster than the more ponderous valuation line, and because their levels are now so near one another, it shan’t take much for the yellow metal to penetrate value to the upside. And you know the trader’s rule of thumb upon such occurrence: Buy…


Third Trend Measure: Here we’ve Gold for the past 21 days along with the ever-popular Baby Blues that measure the consistency of the linear regression trend, the diagonal line by which you can see is still negative, but rapidly approaching flat: ‘tis why the dots are rising and appear poised to break above the horizontal axis at 0%. Consistency levels near 0%, (and indeed between -80% and +80%), are -- well -- inconsistent. However, the overall tilt of this trend appears poised to turn from negative to positive, (and for you WestPalmBeachers down there, you can’t get to +80% before passing above 0%):


The point with respect to these different measures of downtrend is that all three are lacking in terms of any real fallout, and further, all are closely positioned to changing back into uptrends. I was asked point-blank at last Sunday’s Investors Roundtable as to Gold’s closing price for 2012. Without hesitancy I responded: “Certainly between 1800 and 1900; 1850 is my gut feel.” ‘Tis a far cry from that notion put forth at the end of 2011 of “Twenty-Five hundred by Twenty-Five December Twenty-Twelve.” But given the current stance of these downtrends lacking reinforcement and instead seemingly on the opportunistic verge of turning up, as a long-time friend and trading colleague oft quips: “Well, if it can’t go down, then it’s gonna go up.” Not just brilliant philosophical insight there, but ‘tis what markets do.

Gold Separating but Not Exactly Breaking Away…
…at least not as yet. Indeed both Gold and certainly the S&P 500 are down since our Election Day which is denoted at the red bar near mid-chart:


Despite both markets being lower month-over-month, that is the best separation we’ve measured of Gold above the S&P since mid-September, (about five percentage points for the full 21 days as measured at the rightmost part of the chart). Is that a lot of “separation”? Not really. Historically when Gold really breaks above and away from a declining S&P, the 21-day percentage distances generally range from three-to-five times that much. Something for which to look forward, what?

Specific to the stock market in turn playing its declining role, the S&P is really struggling through here. You can see it in the way it meanders across the live screen during each trading session. Traders are pouncing far more on intraday opportunities to sell the Index rather than buy it. As herein mentioned last week, the S&P is by many a “textbook” technical measure quite oversold right now, and to “unwind” that condition it can either go swiftly up or tread water for a few weeks. But that is near-term stuff. A couple of quick views below really put into perspective as to what may well be for the stock market a significant broad-based inflexion point -- from up to down.

First we’ve the exact chart posted herein on 13 October of the S&P 500 going all the way back to 1980, the yellow arrows highlighting the two previous major peaks, (the Dot Com Bubble of 2000 followed by the Lehman Et Alia demise of 2008), as well as a potential third peak and a question mark as to where it could all fall. Now, I’ve only added a light blue line that shows us the basic track of the S&P since first presenting this graphic some four weeks ago:


So has the S&P just put in its next major top? Another great and good trading friend of mine has correctly been on the S&P’s rally since 2009, reminding me ad nausea to “buy all dips until further notice”; I find myself checking my inbox hourly now for “further notice”.

Second, and as much as market technicians turn a deaf ear to this, (and I’m more a technician than a fundamentalist), ‘tis very difficult for the market to forever rise if earnings are not: and they’re not, (forward expectations notwithstanding).

To wit, we just yesterday put the wraps on Q3 Earnings Season as summarized in this chart from the website; the encircled bit is all you need to know:


‘Tis a broad-brush stroke to be sure, but if only half of companies are improving their bottom line, the other half are not. And in the table, that 52% figure of improved earnings marks the lowest reading since Q3 of 2009 in the face of a market nonetheless rising market throughout. Moreover, with an S&P 500 “live” price-earnings ratio at this writing of 22.8x, the market is at best: stuck. Add in a bi-partisan Congressional lean now to raise “revenue”, unstuck means down. Which in turn leads us to the following formula:

Market Down = Economy Down = Monetary Accommodation Up = Gold Up. (Write it down).

Debunking the “Gold Show” Myth
We’ll close out this week’s missive with a little fun here. Each November the Hard Asset Investment Conference, aka the traveling “Gold Show” passes through our once charming City {sigh}. Anyway, a myth making the rounds in recent years is that Gold tends to “top out” for the duration of the year at the end of the Gold Show, which indeed concludes today (Saturday the 17th). You be the judge:


Just three post-Gold Show declines over the last 11 years? Myth debunked!

Gold’s All-Time High: 1923 (06 September 2011)
The Gateway to 2000: 1900+
The Final Frontier: 1800-1900
The Weekly Parabolic: 1788
The Northern Front: 1750-1800
Structural Resistance: 1730 / 1738 / 1754
Trading Resistance: 1724 / 1734
Gold Currently: 1714
Trading Support: 1692 / 1683
The 300-day Moving Average: 1674
Structural Support: 1642 / 1577
The Floor: 1579-1466

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Happy Thanksgiving to us StateSiders!


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