Last year was an eventful one for the
gold market. The yellow metal was up 10 percent in 2011 for its 11th
consecutive annual gain. But despite making an all-time high on Sept. 5 at
$1,900/oz. gold finished the year down 18 percent from that high.
Gold entered a bear market in late
2011 which was confirmed by gold's closing below its historically significant
30-week moving average. This doesn't happen very often which indicates the
technical significance of the event. The last time gold violated its 30-week
MA was in 2008 during the credit crisis and it hasn't happened since then as you
can see in the following chart.
A violation of the 30-week MA doesn't
tell us how long the bear market will last or whether it will result in
significantly lower lows. It only tell us that bear
market conditions are underway and to be wary of market conditions as long as
the gold price remains under this important moving average.
Gold and silver have both been under
pressure ever since a series of margin requirement increases by the CME in
2011. This ran out the speculative element among retail traders and it also
discouraged hedge funds from running the metal prices higher. Savvy market
veterans saw this move coming. George Soros, the billionaire hedge fund guru,
reduced by 99 percent his holdings of the yellow metal in the first quarter
of 2011. Top hedge fund manager John Paulson also sold gold last year
according to exchange data.
The rationale behind gold's slide in
the last four months of 2011 is the ongoing concerns of investors concerning
the financial crisis in Europe. This led to a large scale selling of assets,
including gold and silver, in a concerted bid to raise cash. The demand for
cash in the final months of 2011 was reflected by the rally in the U.S.
dollar index, which established a short-term uptrend in the months of
November and December.
As we saw most recently in 2008,
credit panics always result in liquidation and even the traditional safe
haven of gold isn't immune from such financial shocks. Cash is king in a
deflationary crisis as everything that can be converted into dollars is sold.
The European debt problem hasn't degenerated into a full-fledged collapse
yet, however, so it's clear that investors have been premature in liquidating
hard assets. Perhaps this is a case of investors remembering the pain of 2008
and avoiding the yellow metal on the assumption that the coming months will
witness a repeat of the credit crisis of '08. Regardless of the reason, gold
and silver haven't yet benefited from the problems in Europe and instead
investors have bypassed the precious metals and have flocked to the dollar.
Geopolitical and economic concerns
aside, the best chance for a metal and mining stock recovery in 2012 is for a
rebound in monetary liquidity. Some analysts are optimistic about gold in
2012, in anticipation of a boost to the metal's demand from bond buying
measures by the U.S. Federal Reserve and the European Central Bank. The
median estimate in a Bloomberg survey of 44 traders and analysts is for gold
to rally as much as 37 percent in 2012 to $2,140 an ounce. This may be an
overly optimistic assessment, however, especially if the eurozone
crisis escalates in the months ahead.
Gold's best chance for success should
occur when the European debt drama has been aggressively dealt with by
Europe's central bank and political leaders. Once investors' nerves have been
calmed over the eurozone debt drama we should see a
reversal of the intermediate-term downtrend in gold and silver. This will
occur when central bankers are finally able to coordinate a monetary stimulus
designed to bolster the euro and stabilize the bonds of the major eurozone countries.
Short-term, whenever gold opens the
New Year with a rally it tends to follow up that rally until around mid-month
before pulling back and sometimes through the end of the month. This happened
in the Januarys of 2002, 2003, 2004 (abortive), 2006, 2008 and 2010. In all
the other years since the bull market in gold started in 2001, gold started
the New Year on a down note and usually ended up following through with a
down move until at least February.
Based on this historical pattern gold
has started the New Year on a positive note and could follow up with a series
of higher highs. Keep in mind, however, that in all the previous winning
years just mentioned gold was in an interim bull market above its rising
150-day (30-week) moving average. Entering 2012 gold is below the 30-week MA
as already discussed. This puts gold at a technical disadvantage as compared
to previous years but the yellow metal is still probably oversold enough on a
short-term basis to allow for a test of the 30-week MA. In the SPDR Gold
Trust ETF (GLD), our proxy for gold, the 150-day/30-week moving average
intersects the 163 level in the daily chart.
Looking beyond the yellow metal, the
year 2012 is shaping up as a critical one for the U.S. retail economy. With
the eurozone crisis still looming, there is a real
possibility that U.S. domestic retailers could enter recession at some point
during the year. Let's start by discussing the recent retail sales season.
The 2011 holiday sales season was
saved by deep discounts by the retailers according to results released last
Thursday. Although overall retail sales numbers were good for the Christmas
shopping season, the bigger picture suggests retailers could have a tougher
sales climate in 2012.
Sales at stores open at least a year
at major retail chains rose 3.4 percent compared with December 2010,
according to data compiled by Thomson Reuters, just above the 3.3 percent
that analysts had expected.
The improved sales came at the cost
of deep discounts, however. Profits "were a mess" for many
retailers, said Paul Lejuez, an analyst at Nomura
Equity Research. Consumers were buying less than retailers had expected, and
stores had to mark down inventory to get it out the door by Christmas.
Writing in the New York Times,
Stephanie Clifford observed, "The results show the American consumer has
not bounced back from the recession." Consumer spending accounts for the
largest portion of the economy but flat incomes and a soft job market
pressured retailers in 2011.
"Retailers came in with pretty
conservative assumptions, and they were hoping to blow them out of the water
-- they really didn't," said David L. Bassuk,
managing director and head of the retail practice at AlixPartners,
a consulting firm. Retailers were resorting to promotions like "'50
percent off our whole store,' '60 percent off our whole store,' which is when
you can see times are tough," he said.
One analyst quoted by Clifford stated
that "there's not enough room for all the retailers of old" and
that the New Year would probably bring "closing of stores and, I think,
closing of retailers," he said, adding, "It's a more
dire situation than many had anticipated."
Now let's turn our attention to the
New Economy Index (NEI). This is an important index to monitor since it is an
excellent leadnig indicator for the U.S. retail
economy. This index is simply an average of the weekly closing stock prices
of five of the most economically sensitive stocks that also represent the
main segments of the retail economy. The components are: Wal-Mart, Fed-Ex,
Monster Worldwide, Ebay and Amazon.
NEI predicted that the
November-December sales season would be a good one overall. As I wrote in
early December, "NEI is still in a rising trend and confirms that the
domestic retail economic outlook is positive through the balance of 2011.
December should witness the best retail sales season the U.S. has seen since
before the credit crisis began in 2007."
When the NEI is making lower lows
with the 12-week (red line) and 20-week (black line) moving averages in
decline, the intermediate-term (4-9 month) retail outlook is bearish and this
means retail sales will eventually decline. Here's what the NEI looks like as
of Friday, January 13.
The 12-week moving average has
crossed below the 24-week MA as of Jan. 13 as you can see here. This is the
first step on the path of a negative retail outlook but it won't be confirmed
until the 24-week moving average turns down and the NEI price line falls
under its nearest pivotal low (circled). The latest reading of the New
Economy Index suggests that while the U.S. retail economy is hanging on by a
proverbial thread it hasn't turned bearish just yet.
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