Gold is grinding out a wall of worry
that began construction out of a natural unwinding of the momentum that came
in during the acute phase of the Euro crisis. More bricks were added weekly
by various luminaries calling bearish; the most recent being Buffett’s
right hand man, Charlie Munger: “Gold is a
great thing to sew into your garments if you’re a Jewish family in
Vienna in 1939 but civilized people don’t buy gold – they invest
in productive businesses.”
quote was forwarded by a subscriber as was another piece by an analyst
extrapolating George Lindsay’s work to forecast a coming “Thelma
& Louise moment” (as in cliff dive) for gold. Add to the list an
analyst calling ‘buy’ on US stocks and ‘sell’ on gold
(after the Au-SPX ratio has made a long consolidation to support) and the
first few minutes of this BNN interview with respected geologist Brent Cook http://watch.bnn.ca/ - clip671131
(“we’re going to see some
real destruction across the board in the junior sector”) and we can see
the makings of some nasty sentiment that is
opposite the over bullish condition we noted
was so dangerous last summer.
With the methods I use, timing is
applied to the intermediate swings and on this swing the sentiment backdrop
is now pervasively bearish. That means that the conditions are right for a
bullish setup, although as you will see in this week’s report, the
technical situation remains far from resolved in gold, and still negative in
Here is a little illustration of the
events pre and post the Euro panic blow off compliments of the Au-SPX ratio
I do not mean to make light of the
events in play, but I have seen too often in my years of market management the
tendency for analysis and commentary to come out in justification of whatever
trend happens to be in play. Credit to Buffett and Roubini,
they always hate the idea of gold and what it represents. Gartman
is just following his interpretation of chart signals. No problem there
either. He is only notable because he is widely followed by a lot of big
entities with the ability to move markets.
Then came the last two gentlemen
(among many others), making proclamations that it is time to buy stocks and
shun gold. These high-risk statements are being made just as the relic is
settling down into a support zone vs. the S&P 500 after an
intermediate-term bullish-looking consolidation of last summer’s excess.
Interlude on Deflation: What If?
Let me interject within my own
commentary for a moment by stating that if US policy makers stand on the
verge of changing policies designed to promote inflation, then the gold bull
market would likely be over; stopped dead in its tracks. It is debatable as
to how the above chart would react, because many companies (esp. financials)
in the S&P 500 benefit from the policies of interest rate manipulation,
debt monetization and money printing out of nowhere. So the SPX could still
decline faster than gold.
But gold’s bull market in nominal
terms would be cooked as a real deflation of the massive credit bubble that
has been carried forward would be undeniable. This bubble began with mortgage
related credit and now has morphed into the credit extended to Uncle Sam. In
fact Uncle Sam, already out on an un-payable limb, is basically setting the
terms of his own credit with the help of the Federal
Reserve. That is one of the scariest things imaginable from a monetary
So if Uncle Sam aborts this modus
operandi (Wimpy: “I’ll gladly pay you Tuesday for a hamburger
today”), or if the people force him to do so then it is time to button
everything down and prepare for ‘Prechter
time’. EWI has been out in the wilderness for years, foretelling the
hell that would be an undeniable deflationary unwinding of credit.
As I have noted several times over the
years, Robert Prechter is one of my primary influences. Biiwii.com and NFTRH are not gold bug services. In fact,
it has been very difficult at times for me personally to continue to move
forward with inflationary themes over the last 10 years with Prechter in my ear making so much sense.
So, is the US government going to stop
eating free hamburgers? Is the government going to stop devouring whole
barbequed pigs at a single sitting? Is the government going to get itself
Or is the government going to go
forward as is, enabled by a Federal Reserve that has taken to manipulating
the government’s own debt in search of favorable outcomes in a
presidential election year? Maybe here in the midst of an agonizing time for
the tattered gold ‘community’ it would be productive to think
about a setup that is settling in; one that sees no signs of inflationary
‘price’ pressure (was that crude oil I saw getting hammered at
the end of last week?), and an economy starting to decelerate.
There is one main reason to be
fundamentally bullish gold, and that is due to pressure on policy makers to
compromise currency in the name of inflationary growth.
Back on Topic – WoW
Here is the status of nominal gold as
it finished the week. NFTRH
projected the low 1600’s with the
potential for the low 1500’s about 7 months ago and has been managing
the EMA 70 (currently 1588) since the December low marked it as an important
support level. Those objectives are in the books.
The weekly chart shows a Symmetrical
Triangle, which is a bullish ‘continuation’ pattern. MACD is
thoroughly drained of momentum but it is triggered down (recall that it is
and has been triggered down on a monthly chart for some time now) which means
momentum is still going in the ‘wrong’ direction.
Since Stockcharts.com defaults to log
scale charts (as opposed to the linear scale I usually use because I feel
they show a more ‘real’ picture) and many chartists use log,
let’s review above what they are seeing. The trend line is broken out
of 2008 (this happens to all trends eventually) and there is another, shorter
term Symmetrical Triangle in play. It does not change the analysis. The
Triangle or a ‘higher low’ to the December low must hold for the
bullish technical case to remain on track.
I am supposed to be bearish.
Everybody says so. And indeed NFTRH
would have no choice but to be bearish on
the ‘price’ of gold if the Symmetrical Triangle and the weekly
EMA 70 are violated.
Perhaps some people find this type of
plodding analysis unacceptable. But I find that it pays not to write
something up as having happened (in the face of everyone telling me it is
going to happen) until it, well… happens.
Perhaps the Sym-Tri
is patently obvious and it is just a matter of time before it breaks down.
Indeed, current analysis certainly allows for a breakdown because current
analysis as of last week’s ‘jobs’ report on the back of
previous economic reports, implies a lurch toward economic contraction. And
in an economy built on inflationary policy, economic contractions have a
nasty habit of turning into deflationary episodes.
The play we are working is not one
where gold and USD rise to the heavens during a deflationary episode. It is
one where Uncle Buck benefits on his own for a time as gold potentially
declines but out performs most assets. This is the RPG (real price of gold).
Subscribers and blog readers have
probably noted my lack of patience with authoritative figures out there micro
managing the nominal price of gold. That is because they did the same in
2008, scaring many people out of position, only to see gold double. But also,
it is because the gold mining fundamental case depends on a rising RPG, and
the RPG is not dependent on a rising ‘NPG’, or nominal price of
gold. It is dependent upon what happens on the economic counter-cycle, like
what appears to be setting up now in the economy. This is when gold out
performs other markets and tangible assets.
That is the bigger picture, but the
here and now is another matter and it is near time now to leave this rambling
segment and get on to some analysis. I’ll leave you with some words
from Mark Hulbert http://is.gd/vjD8hH, a rare member of the mainstream
media who I have found to be helpful throughout the gold bull market and the
various Walls of Worry that have been erected over its lifespan:
“While bullion’s listless behavior over
the last couple of months is undeniably frustrating, a very robust wall of
worry is being built. Eventually, gold will begin to climb it.”
“Gold traders’ increasing impatience has
led even more of them to throw in the towel than before — which, in
turn, is why contrarians are confident that gold’s next major move is
most likely up…
When I wrote about gold sentiment two months ago,
this average stood at 16.7%. Today, in contrast, it is at minus 14.8%, which
means that the average gold timer is now allocating about a seventh of his
gold-oriented portfolio to shorting the market. That’s a relatively
aggressive bet on lower gold prices…
In fact, except for a couple of days in late March
when the HGNSI dropped marginally lower to minus 15.7%, its current level is
the lowest it’s been since March 2009, more than three years ago.
And that’s really quite amazing, given that
gold at that time was trading only slightly above $900 an ounce.
In other words, gold traders today are just as
pessimistic about gold’s prospects as they were when gold was trading
for more than $700 less. No wonder contrarians are impressed by the wall of
worry that exists in the gold arena these days.”
All of the above illustrates why we
proceed in a manner that emphasizes risk management and survival in
anticipation of the moment when this massive wall breaks down in the gold
stock sector and in the metal itself. The correction
has gone on longer and in the gold stocks’ case, deeper than I
originally anticipated, but is right in line with the short-term parameters
set when HUI broke down from the early 2012 uptrend (Bear Flag to resistance
at 555) and then, the 475 ‘neckline’.
This proves why it is always a good
idea to manage risk and keep cash for opportunity. The ‘Wall of
Worry’ will probably prove bullish ultimately, but it will only feel
that way to patient individual players who are positioned for it.
Things have been tough in this sector
since the mini mania blew out last year, first in silver and then in gold's
euro crisis momentum. That was last year and this is the hangover. Either the
bull market has ended (I see no evidence of that) or this intermediate swing
is a rare opportunity point in the precious metals. There is no middle
ground. NFTRH will continue to manage risk with an
eye toward opportunity and I would be delighted to have you would join me for
weekly precious metals market management, along with other areas of interest
anticipated to provide opportunity in the future.