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We
are wrapping up October with markets far and wide in the midst of corrections
of varying degrees. The US stock market is following some old clichés
in that it apparently hates the uncertainty of the upcoming presidential
election and well, it is the spooky
month of October after all. The market has done everything it was supposed to do this October and the
correction is not yet indicated to be over.
NFTRH’s
main area of interest is gold for all the reasons brought forward to date.
But gold and its wild and slightly touched little brother, silver –
along with their precious distant cousins platinum and palladium –
remain mired in strong corrections of the formerly over bought reactions out
of September’s QE hype fest. There is no evidence as yet that these
corrections are ready to end.
On
November 6 we in the US will either stay with the devil we know or elect the
devil we don’t (and with a history of flip flops a mile long, I for one
do not know the guy in the least – and he was governor of my state).
The broad US market may be operating on uncertainty and the precious metals
market may be operating under the constraints of a still-Twisting Federal
Reserve and its resultant flattening of the yield curve. Gold follows the
yield curve, no ifs ands or buts and is apparently shackled to and perhaps
through the election.
The
graph above shows the average Dow performance (over the previous 14 cycles)
in all election years, when the incumbent is due to
win and when the incumbent is due to lose. The red box highlights the
timeframe of our current – post QE announcement – corrective
phase.
Interestingly,
today’s Dow is mimicking the average election year to near
perfection! I am going to assume that the market has no clue yet who it
thinks is going to win.
When
it figures this out we might expect a hard decline or a vigorous rise as it
seeks to get in line with either the “incumbent party wins” or
“incumbent party loses” scenarios on the cycle graph above.
As
for gold, it is the same old tired story. I would guess that the Fed watched
it and other assets run for a while into what it knew was an imminent QE
operation. Conveniently, large commercial hedgers knew enough to systematically build up their short positions into last
week’s FOMC announcement, which offered no new inflationary operations
and reaffirmed the yield curve dampening Operation Twist.
While
the Dow may be held captive by the average election year cycle gold is held
captive by something else altogether. When the yield curve (shaded area) is rising increasing stress and inflationary pressure
(pressure to compromise the currency) is indicated to be building within the
system. When it is declining, prudent policy is indicated to have everything
under control.
The
problem here is illustrated by the FOMC’s own words:
“The Committee also will continue
through the end of the year its program to extend the average maturity of its
holdings of Treasury securities” [i.e. Operation Twist]
It
is not a free market telling us that systemic pressures are contained. It is
a non-governmental monetary authority with the power to buy and sell
debt-based ‘assets’ in service to painting desired images and
outcomes. I am going to leave it for other publications to theorize about how
well clued in the commercial traders were to this operation. All we have to
know is that the operation is in force until it no longer is.
To
summarize, there is little doubt that the financial markets are being held
captive to the election process while awaiting clarity and gold is being held
captive to deliberately engineered mechanics within the yield curve.
Don’t fight it. Gold needed a correction anyway. The Fed’s supply
of short-term debt instruments to sell is finite and gold is going to get
where it is going soon enough; as will the stock market.
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