April 5th, 2013

Gold (GLD) in an “Indecision Zone”

I was recently accepted as a “columnist” for the subscription portion of SeekingAlpha.com, a well-respected stock-oriented editorial site, and quickly got my first submitted article accepted.  Much to my disappointment, however, my second submission was wrongly rejected, I believe.  The rejection notice stated:

As a fundamental investing site, Seeking Alpha doesn’t publish articles based primarily on Technical Analysis.  Feel free to post this piece to your instablog.  Thanks!

Sincerely Yours,

SA Editors

As you might expect, this response raised my blood pressure on several counts.

  1. First, I thought that I had summarized most of the fundamental arguments, bullish and bearish, covering the subject of the future direction of gold prices.
  2. Second, I can’t imagine any site that doesn’t take technical factors into account when presenting content about stocks, markets, commodities and forex can do so without including a heavy dose of technical factors and opinion.
  3. Finally, why isn’t there a site that features articles contributed by vetted contributors focusing on technically-based market and stock opinions?  It might even be called www.stockchartists.com

In any event, the rejected article appears below. What say you? Should it have been rejected? Would you be interested in reading or even contributing to a technically-based content market opinion site?

========================================================================

imageI know both the bull and bear fundamental arguments surrounding gold, you’ve heard alll of them before.

  • The Bulls point to the fact that gold is both a commodity used by industry and consumers and, perhaps even more so, a safe haven alternative for fiat money and store of accumulated wealth.
    • Central banks around the world flooding the market with currency that eventually will lead to inflation and rising commodity and gold prices
    • A fixed world-wide supply of gold in a world of ever increasing demand
    • Increased demand resulting from the growth of ETFs
    • Increased demand due to increased wealth from emerging market consumers
    • Increased demand from governments beginning to accumulate
    • Continued political uncertainty
    • Finally, the price of gold is still only around 70% of its inflation adjusted peak price of $2300 reached during the 1970′s energy crisis.
  • The Bear’s argue that the price of gold has quadrupled with only minor corrections from less than 50 in 2005 when the GLD ETF was first made available.
    • Hedge funds are reportedly unloading their large cache of GLD
    • There will be better places to invest your money than gold as stocks and commodities continue to reflect an improved economic environment
    • The bull market for gold paralleled the secular bull market for bonds therefore a reversal in fixed income secular trend will also lead to reversal in gold prices.
    • QE and monetary easing will end soon and the excess money supply that the Fed pumped into the economy will begin to be drained
    • Governments are actually unloading their gold hoards

Rather than trying to second guess the experts and come up with my own prediction of gold’s future direction, I believe price action and trend best represents the consensus of how the world’s investors actually act on their beliefs. There’s no question that the price of GLD has stalled but what isn’t as clear is whether this the beginning of a reversal leading to sharply lower prices or whether this period could be actually represent the end of a consolidation pattern.

In the chart below, there’s not question concerning the top boundary of the pattern … it’s clearly defined.  There are two possibilities, however, for the zone’s lower boundary. The blue dashed line assumes the zone is a descending triangle reversal top pattern while the green dashed line assumes the zone is a flag consolidation pattern. We will be left in the dark as to which pattern interpretation is correct until GLD declines to approximately 137, or down another 7.4%, at which point GLD will likely find some support.

It’s said that “the longer the pattern the stronger the trend out of that pattern”. If the price stabilizes around 137 and then reverses, a major bull move could be launched that could finally carry GLD substantially above its previous high of 182. But if it again fails after that reversal at around 150, or today’s price, then a reversal top would be confirmed leading to further declines possibly to under 100. GLD is clearly in an “indecision zone” (click on image to enlarge) and I would wait to make any further commitments either way (bullish long or bearish short) until investors drive the price out of the zone one way or another.

Bull and Bear Gold Case

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February 15th, 2013

Bullish Technical Gold Outlook

imageHave you ever heard of the “fear industry”?  That’s what Philip Pilkington called those economists and writers who are the leading voices among what can be called “goldbugs”, those who believe that gold is the only safe haven among all asset classes.  In his recent blog post on Naked Capitalism entitled “The Fear Industry – Austrian School Propaganda and the Gold Market“, Pilkington writes

the sheer scale by which the fear industry has taken off is, to be frank, quite surprising. We have all seen the likes of Peter Schiff as a regular guest on the American business news spouting vague talking points about the impending dollar collapse and gold reaching $5000 an ounce…..What is so interesting is that the fear industry grows larger and larger at a time when the make-up of their key market – the gold market – has fundamentally altered its composition…..the fear industry’s most successful year was actually in 2011 and this in turn is reflected in the fact that the gold price reached its record high in the summer of that year……the fear industry has probably stretched itself too thin and it is likely that we saw its peak last year.  From here on in it will probably be diminishing returns and we’ll likely hear of more and more scams as people within the industry compete for ever scarcer resources…… the end game is just around the corner….”

On the flip side of the coin, there’s Trustable Gold who at the beginning of the year in “Gold 2013 – What is the trend for the gold price in 2013 and beyond?” summarized forecasts from various trusted sources:

  • “Bloomberg in November 2012 forecasted a level of US dollars 1,925.- per ounce of gold.
  • The bullion bank ScotiaMocatta forecasts a rising gold price in 2013 and would not be surprised to see a gold price above US$ 2,200.- per troy ounce of gold.
  • BNP Paribas estimated in November 2012 gold to reach US dollars 1,675 per ounce in 2012 and US dollars 1,865 per ounce in 2013.
  • Members of the London Bullion Market Association forecast a gold price of US dollars 1,843.- by September 2013.
  • The global bank HSBC predicts a very similar gold price of 1,850 US dollars per ounce of gold in 2013.
  • The CEO of Newmont Mining estimates that the price of gold in 2013 may increase to US dollars 2,550.
  • In November 2012, Deutsche Bank updated its forecast on the gold price to US$ 2,000.- by next year, i.e. 2013.
  • Credit Suisse expects a gold price of US$ 1,840.- in 2013.
  • In October 2012 private bank Coutts predicted gold prices to reach US$ 2,000.- in the coming months.

At the risk of being lumped with the “goldbug” crowd, I took another look at gold’s long-term trend to see whether I can add anything new to this debate from a technical perspective about gold’s future direction.  I believe I’ve discovered something interesting:

GLD - 20130215

Since it began trading in 2005, the gold ETF, GLD, has had three consolidations in its secular trend higher, each of which lasted around 2 1/2-3 years.  The secular trend channel ascends at the rate of approximately 20%/year and can be clearly seen through the upper trendline connecting the 2006, 2008 and 2011 peaks.  A parallel line connects the 2008 trough with a point slightly lower than the current price, 155.54.

I believe we may be at or very near the end of the most recent 2 1/2 year consolidation and, if the secular trend can be trusted, a new bullish leg will begin shortly.  Extrapolating the channel suggests that the target of this next push higher would be in the area of 240-270 (or gold prices of 2400-2700) towards the end of 2014.

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November 28th, 2012

Head-and-Shoulders Patterns: AAPL and GLD Case Studies

In my book, Run with the Herd, I retell the coin toss experiment from Burton Malkiel’s book, A Random Walk Down Wall Street.  In it, he asked students to

“continuously toss coins with heads arbitrarily representing a move up in a stock’s price and, conversely, tails a move down.  All the price changes were assumed to be of equal magnitude and all were recorded in a line chart.  After an unspecified number of tosses, the students began to see patterns in the charts that looked similar to those of stock charts.”

One of the most talked about, recognized and perhaps most reliable stock chart patterns are the head-and-shoulders and its mirror image the inverted head-and-shoulders. What makes these patterns so important is that they fall into the reversal category (as contrasted with the continuation or trending patterns).  In these patterns, the price/value of the stock, index or commodity makes three different attempts to reverse the direction of the prevailing trend.  Characteristically, the price/value reaches approximately the same level the first two times and then falters; it succeeds in the third attempt and crosses the level reached the previous two attempts. The elements of the pattern include a shorter left “shoulder”, a longer middle “head”, and a shorter right shoulder; all are connected by a trendline at what is called a “neckline”.

As you might expect, as a chartist I believe that comparison between the randomness of coin tosses and stock chart patterns is a false one using the wrong logical argument (incorrectly using deductive reasoning rather than inductive reasoning).  But it is true, however, that the head-and-shoulder chart patterns are easier to perceive in retrospect and not as readily discernable in real-time.  Furthermore, when the pattern has evolved sufficiently in order to actually intimate its future likely outline, the practical question remains as to when might be the best (highest probability of being realized with the lowest risk of being failing) time to act on that perception.  Here are two cases in point:

    • AAPL: At the beginning of the month, I wrote a piece entitled “AAPL Gets a Cold, the Market Gets …..?” when the stock was at 563 in which I included a chart showing a partially formed head-and-shoulder pattern and wrote: “Has the stock hit bottom and is it poised for a turn around (a large Wall Street firm recently called on CNBC for AAPL to more than double over the next year)?  Double it might but in the near-term it’s setting up for another 25% decline below what might be consider the neckline of an emerging head-and-shoulder topall the way down to 390 (nearly 30% from current levels).”Compare the chart in that post with the one below and you’ll find that AAPL is closely following the course outlined there:

      Although Robert Weinstein of Cramer’s theStreet.com wrote today that investors should “Put Away the Prozac, Apple’s Just Fine”, this emerging pattern continues to look to me uncannily like an emerging head-and-shoulders top [Cramer's Action Alerts Plus service has been a long-term AAPL investor with a 90+% profit].  There’s no way to tell whether the stock will follow-through but it pivots and starts declining again, I would order a refill from the pharmacy.

    • GLD: I wrote a piece at the beginning of the summer entitled “When It Comes to Technical Analysis, Accuracy Depends on Time Horizon (GLD)” in which I included a chart of GLD with a pattern that looked like a descending channel and wrote: “I look at a possible breakout from my flag and see a long-term move equal to the preceding the neckline.  I see the possibility of a 75-80% move to the 250-270 level over a year or two.  It all depends on how much time you want to spend managing your portfolio and making trading decisions.”

Today that channel has morphed into what might turn out ultimately to be an inverted head-and-shoulder pattern.  The hesitation in calling it that is that the pattern is developing after a major bull run rather than at the bottom of a major decline.  Consequently, this inverted head-and-shoulder will further morph a consolidation pattern or some type of reversal top pattern.

Bottom line, no matter how good these chart patterns may look a year from now, unless and until they cross their necklines, there’s no certainty that they won’t fail to deliver.  While getting in early will produce a greater return, the trade entails more risk that the stock moves in the opposite direction.  [In fact, even after a trendline is crossed, the stock will often reverse and test the trendline in what is called a "Buyers'/Sellers' Remorse Correction".]

 

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June 7th, 2012

When It Comes to Technical Analysis, Accuracy Depends on Time Horizon (GLD)

My wife ran into my office yesterday and said that somebody on CNBC was saying that the market was making lower highs and higher lows and that, based on that “analysis” she said we should be either selling stock or buying some Ultrashort SPY ETFs.  I looked at my charts and I couldn’t see to what that “talking head” might be referring.  Or, to be more correct, I saw many situations on the S&P 500 chart to which the statement could be applied but it all depended on the time horizon, hourly, daily, weekly or monthly.

I saw another instance of this principle this morning when I clicked open a post by Corey Rosenbloom, well known for his internet go-to website dedicated to a technical approach to the market, Afraid to Trade, and frequent contributor to many other commentary sites like  Green Faucet.  In the ETF Daily News post, entitled “Watching Converging Trendlines in Gold“, Rosenbloom includes the following hourly intraday chart covering the period since December, 2011:

and  writes:

While there’s many other ways you can analyze the current Gold price chart, be sure to take into account this trendline convergence or overlap into the $1,630 area ….  That doesn’t mean price is required to reverse here – it’s just a key level on which to focus and plan short-term trades depending on whether trendline resistance holds (bearish if so) or breaks (bullish above $1,640 for confirmation) ….. A push/ breakthrough beyond $1,640 strongly suggests a Structural Reversal of the short-term trend, implying higher targets ($1,670, $1,700, etc) could be achieved in the context of a new intraday uptrend ….. The recent push above $1,600 locked in a “Higher High” which is the first step to a structural reversal).

My trading horizon is longer than that inferred in Rosenbloom’s strategy.  If precious metals is a good place to put my money in the hope of appreciation (the only form of return since precious metals don’t  pay dividends or interest) as an alternative to other opportunities then I want to make sure that the percentage gain will be significant.  I own a large number of stocks and, once I put precious metals (or any other stock for that matter) in my portfolio I don’t want to necessary have to make hourly or daily decisions as to whether it’s worthy of continuing it being held.  The only way of doing that is to focus on more elongated trendlines, longer waves and bigger swings.

That’s why included a longer term chart a month ago (updated to yesterday’s close), in “Buffett and Precious Metals

and wrote

Both charts [I'd also included a chart of silver] contain familiar features:

  • descending channels;
  • potential necklines;
  • a zone that could indicate whether the controlling pattern is a consolidation or reversal;
  • lack of clarity as to whether price will cross below the potential neckline

With all that upcoming uncertainty in the $US, I can’t imaging that the emerging pattern in precious metals isn’t a consolidation and, with all due respect to Warren Buffet, there won’t be another run higher beginning towards the end of the summer.

Rosenbloom looks at possible breakout from his “converging trendlines” and sees a move to the 1670-1700 (or, approximately, 167-170 in GLD) presumably over several weeks.  But then what is he going to do with this 4.3% move?  I look at a possible breakout from my flag and see a long-term move equal to the preceding the neckline.  I see the possibility of a 75-80% move to the 250-270 level over a year or two.  It all depends on how much time you want to spend managing your portfolio and making trading decisions.

May 9th, 2012

Buffett and Precious Metals

It’s been some time since last discussing precious metals so I thought I’d revisit those charts to see if something new might be revealing itself.  What struck me was the near perfect patterns in both the charts that stretch back almost a year to the early days of the European sovereign debt crisis began in August 2011.  The only problem is that one can interpret the emerging patterns as either consolidation (flags) or as reversal (right triangles or head-and-shoulders) depending on whether you’re a gold bug or Warren Buffett.  On CNBC this past Monday, Buffett stated that

When we took over Berkshire, it was selling at $15 a share and gold was selling at $20 an ounce. Gold is now $1600 and Berkshire is $120,000. Or you can take a broader example. If you buy an ounce of gold today and you hold it at hundred years, you can go to it every day and you could coo to it and fondle it and a hundred years from now, you’ll have one ounce of gold and it won’t have done anything for you in between. You buy 100 acres of farm land and it will produce for you every year. You can buy more farmland, and all kinds of things, and you still have 100 acres of farmland at the end of 100 years. You could you buy the Dow Jones Industrial Average for 66 at the start of 1900.” Gold was then $20. At the end of the century, it was 11,400, and you would also have gotten dividends for a hundred years. So a decent productive asset will kill an unproductive asset.

As is usually true with statistics, there are several interpretations depending on what you’re trying to prove.  Forbes points out in that same article that Berkshire would have outperformed gold over the 20 years since Buffett started Berkshire Hathaway but the reverse was true over the last 10 years as gold far outshined Berkshire stock.

What do the charts say?  Again, it depends on the frame of mind of the observer:

Both charts contain familiar features:

  • descending channels;
  • potential necklines;
  • a zone that could indicate whether the controlling pattern is a consolidation or reversal;
  • lack of clarity as to whether price will cross below the potential neckline

I’m not an economist but it would seem to me that with all the uncertainty surrounding the future of the Euro money would continue to boost the prices of precious metals.  Instead, Euro Zone investors have been dumping money in what they assume to be the world’s last safe haven, the $US … even when they earn near next to nothing.

But with another round of our own debates on our deficits, federal budgets and taxation coming at the beginning of the year after the Presidential election, so analysts say it’s going to be like falling off a cliff.  If anything happens to interest rates here it’s going to have to be that they go higher and bond prices are going to decline.  Foreign investors are going to begin seeing increased risk in US bonds and will jump ship quicker than they climbed on board.

With all that upcoming uncertainty in the $US, I can’t imaging that the emerging pattern in precious metals isn’t a consolidation and, with all due respect to Warren Buffet, there won’t be another run higher beginning towards the end of the summer.  For all those conspiracy afficionados out there, perhaps Buffett wants us all to sell our gold so that he can scope it up at this price and lower.  After he’s bought all he wants and these prices , he could even come back in August and say that everyone should own some gold and thereby start pushing the price higher.  He’s a nice guy but he didn’t get to be the richest man by being a sweetheart.

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December 14th, 2011

The S&P 500/Gold Ratio

On Wednesdays, the focus here at the Stock Chartist blog is on individual stocks or ETFs and the topic today is GLD.  GLD is the 2nd-highest capitalized ETF behind only SPY; it’s nearly triple the capitalization of QQQ. Some can look at the price of gold in purely economic terms to arrive at what they feel is a theoretically correct price; others attempt to correlate the gold prices to other assets to see whether they are in line in a macro- way and, finally, one can look gold prices in purely technical terms.

  • Some say that the price of gold has a fixed relationship to the rate of inflation.  Specifically, Eddy Elfenbein has estimated that relationship to be that “for every one percentage point that real rates differ from 2%, gold moves by eight times that amount per year.  So if the real rates are at 1%, gold will move up at an 8% annualized rate. If real rates are at 0%, then gold will move up at a 16% rate (that’s been about the story for the past decade). Conversely, if the real rate jumps to 3%, then gold will drop at an 8% rate.”
  • The stock market, as represented by the S&P 500 Index fluctuates within a fairly wide range when priced in gold rather than the $US.  I wrote about this last May in which a inserted the following chart (since updated) which shows the S&P 500/gold: S&P/Gold Ratio since 1971

“The ratio is a function of both variables, the price of gold and the value of the 500 largest US public companies. Both variables are equally driven by value of the $US, domestic and international economic trends and a host of other drivers. Alternative possibilities for the ratio are possible through almost an infinite number of combinations of both variables. Some gold bugs claim that the price of gold is headed to the $4000/ounce level without indicating what they think will happen to the stock market. That doesn’t work for me.Make your own guess as to where and when you think the price of gold will be. But you should also forecast where you think the S&P 500 might be at the same time. It’s only after you calculate their ratio and see where it plots on the above chart will you be able to assess the reasonableness of those projections.Once a long-term trend begins it’s hard to reverse. I can accept $4000 gold and the S&P hits 2000 (a 50% increase from current levels) for a ratio 2.0 in 2014.”

  • The charting approach is to look for reversals in the chart of the GLD etf (click on image to enlarge):

Everyone continually is on the look out for the big reversal, the one that will carry GLD back below 100 and gold below 1000.  Let me tell you with a high degree of confidence and certainty that a move as substantial as GLD has had since 2006, a reversal when it comes won’t happen in a week or month.  It’ll take quarters.  In the meanwhile, retracements like the many that occurred since 2006 and are plainly visible on the above chart, are only pauses in a long march higher.

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March 26th, 2011

Gold and the S&P 500 Since 1971

Recently, in “The Gold Value of Commodities“, I theorized that, based on relative prices going back to 2006, “….there has been a bubble in precious metals [since 2008], one that has to return to a more realistic relationship with other hard and soft commodities.” A reader asked whether I had comparable data going back 40-50 years? I promised I would do some research and come back with what I had found.

What I found surprised me as I think it might you, too.

One would assume that there’s reversion to the mean at work when it comes to the relationship between the price of gold and of the stock market. International financial liquidity and money flows could drive prices of metals or financial instruments temporarily out of kilter with one another but, over the long run, these prices will tend to revert back to some sort of mean relationship.

We see that happening across markets all the time:

  • High industrial metals prices acts as a brake on demand and those prices will adjust back into line.
  • A declining Dollar makes US stocks relatively more attractive to foreign buyers driving new demand pushing both the Dollar and stocks higher.
  • Stock prices will rise until fixed income securities begin to look attractive on a risk/reward basis. Conversely, money will flow from fixed income investments driving down their prices when interest rates become too low relative inflation or the returns available in stocks.

A similar long run relationship exists between the average value of stocks (as measured by the S&P 500 Index) and the price of gold. This relationship (the ratio of SP500 divided by the price of Gold in $US) has fluctuated in a wide range since the US first went off the gold standard in 1971. At the end of January 1971, gold cost $37.88/oz while the S&P 500 Index closed at 95.88 for a ratio of .395. Since then, the ratio has fluctuated in three long-term trends with an extreme high of 5.98 in 1980 (at the end of the 1970′s oil embargo, secular bear market and astronomical interest rates) to an extreme low of 0.18 (at bursting of the Tech Bubble in 2000) (click on image to enlarge):

The ratio is now almost exactly in the middle of that range (when measured on a logarithmic scale measuring percentage changes) with the S&P 500 (1372.73) and gold (1327.22), nearly at parity (1.034) on Feb 28. The big question is where the ratio might be headed over the next 5-10 years. Will the ratio continue its current long-term trend higher climbing back to 4-6 range or might it now reverse and begin a slow, long-term descent to the .2-.3 range?

The ratio is a function of both variables, the price of gold and the value of the 500 largest US public companies. Both variables are equally driven by value of the $US, domestic and international economic trends and a host of other drivers. Alternative possibilities for the ratio are possible through almost an infinite number of combinations of both variables as follows (click on image to enlarge):

Some gold bugs claim that the price of gold is headed to the $4000/ounce level without indicating what they think will happen to the stock market. That doesn’t work for me.

Make your own guess as to where and when you think the price of gold will be. But you should also forecast where you think the S&P 500 might be at the same time. It’s only after you calculate their ratio and see where it plots on the above chart will you be able to assess the reasonableness of those projections.

Once a long-term trend begins it’s hard to reverse. I can accept $4000 gold and the S&P hits 2000 (a 50% increase from current levels) for a ratio 2.0 in 2014.

March 17th, 2011

The Gold Value of Commodities

In a piece entitled “Gold: The Next, Last Bubble” from about a year ago, I wrote

“The rise in the price of gold didn’t start last month or last year. It really started to run (see chart above) about the same time as the US deficit started to balloon due to the recession following the DotCom Bubble Crash and 9/11. Rather than slowing down, the worldwide financial crises and recessions could accelerate the rise. Consequently, gold now has characteristics similar to the objects of earlier bubbles with two exceptions: its demand is worldwide and governments could stop it by agreeing to fix currency exchange rates fixed to gold”

Since that post, GLD has risen another 16.5%, nearly twice the 9.83% growth for the S&P 500. But I like step back and look at a longer-term picture (click on images to enlarge):

This view clearly shows the dramatic increase in the price of gold (GLD) and silver(SLV) in $US since April 28, 2006, the date each index begins and was set at 100.0.

It’s often been said that the decline in the exchange value of the $US is one of the main causes for the rise in commodities and precious metals. However, of the same period, the index measuring the exchange value of the $US against key trading partners (DXY) has been relatively stable:

Precious metals, especially gold, is considered a store of wealth, one that is supposed to the global currency into which all national currencies can be freely converted. If a national currency, like the $US or the Euro changes its value relative to other currencies due to that countries monetary policy, citizens can buy gold with their currency and may, in the future, sell that gold at the currency’s new value. If the $US has remained relatively unchanged over the past several years when measured in terms of the basket of other currencies then the price of gold will have gone up in price approximately the same amount when priced in each of those other currencies.

So what has happened to the price of the stock market, oil and commodities when priced in the universal medium of exchange, gold, rather than $US:

What is striking is how little change there’s been in stocks (as measured by the S&P 500), the prices of oil (USO) and other commodities (DBC) when priced in terms of gold since the end of 2008. With all the discussion about food shortages and increased demand for oil and other demand for commodities, the price of commodities hasn’t been reflected in their prices when expressed in terms of the gold.

Either these prices haven’t been pushed up because there actually aren’t any supply/demand imbalances or the price of precious metals, that universal currency has been devalued and inflated. That’s why I sold almost all my precious metals. I believe there has been a bubble in precious metals, one that has to come back into a more realistic relationship with other hard and soft commodities.

October 7th, 2010

Three Simple Rules That Explain Everything

I’m intrigued by two dramatically different charts that I’d like to bring to your attention: EEM and GLD. I’ve superimposed onto both of these the S&P 500 (in blue) for comparison purposes. Before saying another word, let me show you what I’m talking about (click on images to enlarge):

  • EEM vs. S&P 500

    The take-away from this chart is that both the U.S. and the Emerging Markets had similar declines from the 2007 to the 2010 peaks, EEM has be able to break above that trendline (solid red) while the U.S. is struggling just now to break above its trendline (dashed blue). I fall back on the mid-term election year market cycle I wrote about back in January along with the trickle of better economic news (leaving the politics of it aside) and count on the U.S. markets to follow the rest of the world to higher ground in 2011.

  • GLD vs. S&P 500

    The take-away from this chart is the huge divergence between GLD and the S&P 500. Listening to the day’s market reports you’d think that the world began in the morning. The reports usually are shouted as if they were actionable alerts, critical turns, outstanding price movement. In fact, the real story stretches over years. While it’s true that GLD has seen some dramatic volatility, it has been in a fairly steady uptrend. Will this move carry GLD up to 200+, where the top boundary extrapolated might wind up? No one can say but I’d say the odds are pretty good if you have the patience (and the world’s central banks don’t spoil the party.

If you key your eye on the long-term rather than day-to-day fluctuations, I believe the following three wonderful phrases encapsulate just about all you’ll ever need to know about the stock market:

  1. “Trends, once established, have greater odds of continuing than of reversing.”
  2. “Focus on the turns and the trends will take care of themselves”
  3. “Extremes tend to always revert to the mean”

How could that apply to GLD and EEM?

  • GLD is in a trend that will continue. It is approaching the mean today, will probably go to an extreme above before trend reverts back to the mean.
  • EEM is breaking out of the year-long consolidation to continue its uptrend. The rest of the world, including the US will follow suit soon.

May 26th, 2010

Why Gold Prices Aren’t Rising

There’s much conversation these days about how commodity and precious metals prices have stalled or even declined (as represented by their respective ETFs) with the slow down in the worldwide economy and volatility in international currencies and financial markets frequently being given as the explanation.

At times like these, wealth’s tendency is to reduce risk (i.e., sell assets) and seek safety. Since the locus of today’s uncertainty is the EU, one such safe-havens appears to be the $US, causing it to appreciate 16.28% against a basket of foreign currencies since December 1.

Gold has been another traditional safe-haven throughout history. And yet, due to our usual provincial view of the world, Americans question gold’s traditional role because its price has increased only marginally, to 118.47 for the gold ETF today vs. 117.37 at the close on December 1, 2009. With all the turmoil in Europe and its Euro, why hasn’t gold appreciated if it’s such a safe-haven.

It depends on which currency of the foreign exchange prism you viewed the price of gold. If you lived in Paris or Geneva or Sydney, you probably wouldn’t be asking the question. For example, the price of gold in Euros has appreciated 25.5% since December 1. Gold’s price has also appreciated for those who look at it in terms of Swiss Francs, UK Pounds, Australian Dollars and Japanese Yen (click on image to enlarge):

Because gold is a store of wealth, it’s price fluctuates both in terms of it’s underlying supply/demand relationship and in terms of the exchange value of the specific currency into which you want to convert it, something that’s also true for other commodities like oil, copper or silver.

Gold appears to us to not have appreciated because the $US has increased in value relative to other currencies so much in such short a time. In retrospect, those in Europe who were looking to dispose of their Euros could have been essentially indifferent between converting them into either $US or gold since their prices (in terms of Euros) have moved essentially in tandem. What does it mean for us in the US? So long as the $US is considered as much a safe-haven as the precious metal, it could be difficult to look for gold to appreciate much. But how safe a haven is the US actually?

Again, in our provincialism, we criticize the sovereign debt crises of Greece, Spain and other European countries and recommend courses of action they need to take to fix their problems but don’t look in our own backyards to see the mess we’re in. The US debt represents 24% of the world’s sovereign debt (followed by the U.K. with 16%) and yet only around 2.59% of our debt is back up by of gold ranking us 54th among all countries (while the U.K. ranks 92nd with less than 0.15% of their debt being backed up by gold).

How long before the focus shifts from the Euro as a week currency to the Pound and then the $US? Perhaps the traditional June 30 fiscal year-end for Federal, state and local governments and the debates that will ensue regarding deficits, budget cutting, and defaults will be the trigger sending foreign money to again flee for safety, joined this time by Americans, causing the $US to decline and gold and other commodities to increase.