Big move in gold and silver ahead

People often ask me how I got so damn good at trading and I figured the answer to this question is so important, I'm gonna go ahead and make this post open to the general public.

My secret is that I have so many charts, with so many lines everywhere, that when I scroll through them (usually during a pedicure), one of them is always liable to be at an important point. So, e.g., I saw a chart in the comments of Kid Dynamite's post on gold manipulation today, and knew I had my own version of that chart somewhere. (There are very few charts I don't have, although I've finally given up on following the 3-month heliocentric cycle of Mercury. I now look only at the 5- and 10- minute versions).

And lo!! it's at an important point.









Based on where the correlation between gold and the TIPS (~real interest rates) is right now, usually something dramatic happens.

I'm watching now to see if the correlation drops to the grey zone ... that's when historically we either have a local top/bottom. If the price of gold is falling when the correlation w/ real interest rates crosses the grey threshold, that means bottom, and vice versa.(Naturally, since gold and real interest rates should move together).


**UPDATE: In response to commenter Daniel's confused query let me add this explanation:


Basically I have the same correlation indicator repeated twice at the bottom, one has a green horizontal threshold, one has a gray horizontal threshold a little bit lower. Looks like more than 3/4 of the time, if the correlation drops below the green horizontal line, it goes all the way down to the grey. So the green vertical lines mark where the green horizontal line is crossed, and the grey vertical lines mark the entire span where the correlation stays below the grey horizontal line.

Every time correlation hits the grey threshold, it's marked an important top/bottom.

I actually added the green line to the chart today to mark where the correlation currently is, then realized it has some significance in itself, e.g. for a long straddle option play.



BONUS CHART:
From GM's VAULT
Free hat to anyone who sees what's going on here ...




18 comments:

Daniel said...

whats the causation for the green vs grey shaded areas?

GM Jenkins said...

It *is* a confusing chart, Daniel - I could've made it simpler/explained it better, but short of time. Added explanation above, see post.

GM Jenkins said...

In other news, it turns out that there really is a "David P. out of Europe." Out of Sweden to be exact. And he is the proprietor of a fine blog. By way of apology for accusing him of being Eric King's chart-stealing alter ego, I've invited him to the next Screwtape yacht party.

This post of his echoes what I've been getting at, that the trading range we've been seeing in gold and silver is about to be broken in a big way
http://dave1bs.wordpress.com/2014/05/09/gold-stock-bear-analogs-silver-price-volatility-lowest-in-decade/

costata said...

Hi GM, thanks for the David P. link.

If industrial demand is robust and the supply of silver is back around 2010 levels as claimed in the posts that David P. linked it creates the potential for the "spiders" (bullion banks) to run the price and offload their positions into the industrial inelastic demand during the dump phase of the game. So the forces of not-niceness might get behind a run up.

One thing that troubles me about this scenario is that from my observations over the past few years gold has to run to some degree in order to validate a significant move in silver. IMO the fundamentals for oil appear to be very weak at present and for people familiar with the Freegold theories it would be a BIG story if gold ran significantly higher and dragged the gold:oil ratio higher with it.

Anyway that's my 0.02

Cheers

costata said...

S Roche recently tweeted a link to this post:

http://allstarcharts.com/epic-squeeze-us-dollars-just-began/

I thought posting a link here would be worthwhile given the discussion I have been having with GM et al about USG bonds. I guess the question is whether this is a Euro breakdown story or a US dollar strength story in the charts provide at the linked post above? If it's a case of the US dollar finding stronger demand what are those dollars going to be used to buy?

As I was about to hit publish it occurred to me that there are a couple of ways to play a rising USG bond market - the bonds themselves and the currency used to buy them

Anyway this is above my pay grade. What do the higher intellects here make of all this?

costata said...

GM et al,

I found this article about the recent action in the US bond market interesting:

http://www.marketwatch.com/story/are-treasurys-anticipating-an-event-2014-05-15

"The behavior of long-duration Treasurys so far in 2014 has been nothing short of incredible.....

.... rates we are seeing now may actually be normal in the context of structural-deflation forces decades in the making: the wealth gap, technology and demographics...

In a paper I recently co-authored with my colleague Charlie Bilello, we show that going back to 1977, strengthening long-duration Treasurys tend to precede periods of higher volatility for the stock market.....

Take a look below at the price ratio of the iShares Treasury 20+ Year Bond ETF TLT -0.14% relative to the iShares Treasury 7-10 Year ETF IEF +0.02%.....

What is it that Treasurys are so afraid of to justify such a move? Is there some concern of a coming event which is being priced in to bonds, but not stocks?"


Food for thought.

GM Jenkins said...

Very good, thanks costata. Trader Dan has also been following these developments. Some good comments there on the topic.

costata said...

GM,

In the exchanges in the comment thread a couple of the responders that Trader Dan replied to appeared to be leaning in the direction the article I linked above was exploring i.e. bonds are flagging trouble ahead in the stock market. Trader Dan was holding the line he took in his post that something has happened to spook the bond market but it is not clear what.

costata said...

More food for thought in this tweet:

Lawrence McDonald ‏@Convertbond 7h
Since 1962, the S&P 500 experienced a plunge of at least 14% in 10 of the prior 13 midterm election years

http://lawrencegmcdonald.com

The Presidential election cycle correlations also appear to hold up pretty well. Perhaps this mid-term cycle is in play and it helps to explain the bond market action.

costata said...

Chuck Butler discussing the fact that bank CDs are at levels of 10 years ago (adjusted for inflation) and suggesting most/all of the maturing CDs have gone into the stock market:

http://www.kitco.com/ind/Butler/2014-05-14-Daily-Pfennig-Aussie-Budget-Looks-Out-Long-Term.html

Weak hands? Sitting ducks?

And one of the things that scare the bejeebers out of me. I'm concerned that retired people or people nearing retirement have extended their risk parameters, and a price shock could really throw a spanner in the works for their retirement plans.

costata said...

Tweet:

Lawrence McDonald ‏@Convertbond 1h
Great Rotation?

$38B high grade corporate, supranational and sovereign debt priced last week, blowing away estimates for $25B #Bonds

costata said...

A post looking beyond the S&P 500 and Dow in order to see what is happening outside of the major corporate names:

http://www.testosteronepit.com/home/2014/5/12/the-brutal-beneath-the-surface-slo-mo-crash-of-stocks.html

The stocks of the largest corporations have been doing pretty well. Due to their enormous market capitalization, they dominate mathematically the capitalization-weighted indices. And in that capacity, they paper over the systematic, wholesale destruction of smaller stocks, and particularly of the darlings of the last few years.

Some of this destruction has gnawed through the layers of large-cap stocks in other indices: the NASDAQ is down 6.9% from its 52-week high in March; the small-cap Russell 2000 is down 8.8%; the IBB Biotech Index 17.8%; the FDN Internet Index 18.9%; the SOCL social media index 27.0%.... It’s brutal out there.

Gary said...

'Naturally, since gold and real interest rates should move together'

Can you dig up a chart comparing USTs 2s-30s spread to the gold price.

I think that would show what to expect next (in a deflationary period). Gold changed in late 2011 by the way, in case you didn't notice.

Thanks.

Gary said...

Here you go...gold is now NOT following the yield spread, NOT benefiting from inflation expectations rising....so...only deflationary results will get gold on the move up.

http://biiwii.com/wordpress/2014/03/19/nftrh-update-post-fomc-status-precious-metals-stock-market/

GM Jenkins said...

Thanks for the links guys.

I gotta look into the "slow motion stock crash" -- I don't follow equities too closely other than Dow and S&P, had no idea that was happening.

Also the 30 yr vs. 2 yr as inflation gauge -- why haven't i been looking at that?

costata said...

GM,

Tweet from another TA guy:

J.C. Parets ‏@allstarcharts 7h
Here's your S&P500 $SPY closing at new 52-week highs with fewer and fewer NYSE stocks participating http://stks.co/c0age

Cheers

costata said...

More evidence of divergence?

Retweeted by J.C. Parets
Downtown Josh Brown ‏@ReformedBroker 4h via @allstarcharts

- just 48 NYSE stocks hit new highs yesterday.

48.

Party on.

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