The Good
Thursday's ISM report was Thing 1 in improving the
backdrop for gold. But it was a small Thing. Friday's August Payrolls report was Thing 2, and
it was a better Thing. Gold and especially the gold mining sector are
invigorated fundamentally during economic easing, not during economic growth
phases, inflationary or otherwise.
In this post we'll review two of the charts (gold vs. commodities and gold
vs. stock markets) we have used since before the new gold bull market began
in order to update some important macro fundamentals. Most of the
ratios on these charts have not broken down even as the economy and with it,
stock markets have experienced a recent bounce, which we anticipated through
various signals belabored repeatedly, since before the BREXIT hysterics.
In the ginned up macro atmosphere the US Fed and its global cohorts have
cooked up, things move quickly and we need to move even quicker. Maybe
not always in action (that depends on individual trading style) but in
thought and in preparedness. We were well prepared for the 'oops,
it's not bearish!' phase that caught most off guard coming out of
BREXIT. That was due to cross referencing different indicators.
We also want to be prepared for a turn the other way, not necessarily to
bearish for stocks, which as we have shown, have dutifully followed money
supply (see Why the Convoluted Message From Yellen?).
I don't know about you, but I find the charts in that post to be truth
tellers rising above all the noise.
So all through the post-BREXIT endorphin release we have noted in NFTRH
how, despite the big stock market bounce, the buoyancy in bonds, and the
resurgence of some commodities, gold somehow managed to remain intact in
ratio to most of these items.
Now flagging ISM and Employment, while not definitive, are definitely a
welcome sign for recently beleaguered gold bugs. So too was the
recently over bearish sentiment and the over sold technical readings of the
sector. That micro management is generally for NFTRH premium (we noted
the bounce potential in real time on Thursday in an update) but the backbone
of the entire investment thesis lay in indicator charts, which represent most,
but not all of the proper fundamentals for the gold sector.
Here is the updated view of two of the four 'Gold vs.'
multi-indicator charts (the others being Gold vs. Currencies and Gold vs.
various Bonds) we regularly review. Gold vs. Commodities largely
remained intact to its up trends vs. most items. The exceptions are vs.
palladium, which made a positive economic (bounce) signal in breaking down,
and vs. silver, which indicated financial market risk 'on' (among other
things) when it broke down. Gold-Silver then attended market (and
precious metals) weakness on its recent bounce to test the breakdown.
If Gold-Silver is heading back down again, it is advisable not to be short
the financial markets, especially the precious metals.
 
So gold did break down vs. the two 'commodities' that are also precious
metals, palladium and silver. But it did not break down vs. the
straight up commodities (though it did drop hard vs. oil) that are positively
correlated to the global economy.
Even better, gold never broke down vs. major stock markets. We have
been calling this a potential negative divergence to stocks, but probably not
if gold continues to decline vs. palladium and especially silver, which would
indicate a more risk 'on' and economically benign environment.
The Not Yet Good
Yield curves have not been beneficial. A rising curve can indicate
one of two things; stress in the financial system as yields decline but
short-term yields decline faster (in a rush to risk 'off' liquidity) or an
inflationary environment, as yields rise but long-term yields rise
faster. So far, it's not happening. Yield curves are benign and
market friendly and while I'd expect the curve to be driven upward by one of
the two noted conditions, so far all's well and the stock market's rally is
well founded by this indicator. Gold's bull market may be looking ahead
to a rise in the curve, but so far this is a holdout fundamental.
The nominal view of the 10's and 2's shows that the 2 year yield remains
in a post-2012 uptrend but has trended down in 2016. The longer uptrend
remains a potential hazard for gold bugs unless the curve above starts to
rise.
Another sign that inflation is not yet in play is commodities vs. stocks,
which are as yet a non starter.
Amazing how similar this chart looks to the yield curve, isn't it?
But gold's best fundamental environment is not inflationary, it's best
fundamental backdrop is a risk off, liquidity constrained situation.
Yet like the inflationary scenario, that has not yet engaged either. We
are likely in process to one of these situations, inflationary asset
speculation or deflationary liquidation. How's that for disparity?
Regardless, it's benign now and with the tepid jobs and manufacturing data
last week, the risk 'on' trade is emboldening once again. 'Come on
in, the water's fine!' beckon the bulls. For now, gold is just
another casino patron at the party. That will not remain the case
forever.
I wonder if our friends, the Pigs, are actually showing the way to an
eventual global inflationary resolution. Aside from the US Bank sector,
which we have been tracking in recent weeks and noted here on Tuesday, global banks are starting to break
out as well. European and Japanese Bank indexes look like they are
making moves.
Is the jig up on global NIRP? Will confidence in Central Bankers
take yet another hit? The waning of confidence in these clowns is after all one of the major, though
admittedly blunt, fundamentals for gold. Here is the state of US and
global bond markets, in the face of NIRP, as inflicted by desperate policy
makers. These items remain in downtrends but one wonders if the Banks
are looking ahead to something more than a bounce. Look at the Japanese
10 year.
Bottom Line
Markets do not move at the speed of the functions in the frontal lobe of
your brain. They move at the speed of a sloth with lots of frenetic
activity (i.e. noise) along the way. Gold has made a big move in 2016 and
the sector became over sold last week and ripe for a bounce. What's
more, some fundamentals improved. But the market has not yet shown its
hand on what the ultimate drivers will be.
We'll manage the sector's technicals, as always, in NFTRH (gold stocks for
instance, while on the expected bounce, generally remain below important
resistance levels) but the true fundamental picture is in the process of
revealing itself. Don't let the Easy Answer Brigade fool you with talk
about how simple the situation is. Whether it is someone using index
and stock charts in a vacuum, someone else touting inflation or another guy
working the Armageddon shtick. As you can see by the somewhat confusing
narrative above, this is not at all simple my friends. With non stop
aggressive and experimental policy input since 2008, how can it be? Be
prepared to work at this and guard against automatic and linear
thinking. It's a financial Wonderland after all.
NFTRH.com and Biiwii.com
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