Gold in euros is at a potentially critical point.
I've been looking for a good entry point to make another aggressive play in the PMs since the May gold correction and silver collapse. It's been about 8 weeks. Given the rising commodity prices and the bad rap QE2 got, there was an idea going around (Marc Faber, for one) that the Fed would dramatically announce an end to QE3, leading to a 2008-like collapse of the stock (and commodities) markets, giving them an excuse to print more money. After Bernanke's talk today, that's looking less likely to me now. The path of least resistance is the one you bet on, and my guess is that they're going to keep flooding the system with liquidity while trying to implement a slow, managed rise in commodity prices by whatever means at their disposal.
For one thing, the chart of the CRB Commodities Index does not appear to be poised for a 2008-type collapse. Keep in mind, for 5 years, from September 2001 until September 2006, the CRB rose at a steady rate of 17% (orange lines), at the end of which, it stood 10% higher than where it's at now (see upper red/green horizontal line). It then corrected for ~6 months before beginning a truly hyperbolic ascent that led to the 2008 collapse.
In the only 2.5 years since the bottom of that collapse, the CRB has been rising steadily at 23% (bright green lines), and its 200-day moving average (purple) is currently where it was in May 2006 (see lower red/green horizontal line). So, I find it hard to believe that TPTB would intentionally risk the chaos of a market crash at this point, including a further decline in housing, to "control" an inflation that they don't feel compelled to concede even exists, as of yet.
On the other hand, the CCI Commodity Index, which weighs oil prices much less, is about 5% over its 2008 peak. Note that, unlike the CRB, this index went up steadily for about 7 years (2001-2008) without a serious correction, before the 2008 collapse. Interestingly, using the "Raff Regression Tool," you see that the slope of the trend since the collapse (blue lines) has not changed at all from the slope before the collapse (grey lines). It's as if the entire graph was simply shifted down, to continue its ascent. I could see it moving up all the way to the top blue line again before people really get alarmed.
Also, note that the orange 233-day moving average (we use Fibonacci numbers here at Screwtape - we're sophisticated like that) appears to be a very strong basis of support for almost a decade. Well, that moving average is right around the level of the 2008 peak that proved to be resistance last November (see red/green horizontal line). If the CCI falls another 5% to that point, that to me would be a bullish signal for re-entry.
On the other hand, I wouldn't be surprised at a breakout from here. For one thing, the mining stocks have woken up. In poker terms, I think we've been dealt a Q-10 or K-9 right now. I'm going to see how things play out this week, and wait at least until options expiration Monday to go back in aggressively.
Here's a chart of the Shanghai Stock Exchange Composite Index (^SSEC). In the background (green), I charted 1/$USD, i.e. the inverse of the dollar index as a measure of dollar weakness. Notice how closely related these two indexes are, for several years now. Strength in the ^SSEC is closely tied to weakness in the dollar, and vice versa. Neither is a function of the other, since sometimes the dollar leads (red circle), while other times the ^SSEC predicts future events in the dollar (blue circle). But changes generally do not happen simultaneously.
Now, look at the ratio between the ^SSEC and the dollar ($USD). Like so many other dollar-related charts, this one is at a critical point right in time for QE3. We're at an important trend line (the base of an ascending triangle), and the RSI is under 30, which would signal the dollar is due to fall and/or the ^SSEC to rally. We'll find out soon enough.
I mentioned in my last post that I've been fitting a regression line to data points, then using its slope to create trend lines and channels. However, stockcharts.com has something called a "Raff regression tool" which creates regression lines using some other criteria than just minimizing distances of squares from the line, since the tool clearly seems to overvalue minimum and maximum points. So, I have two slightly different trend channels for you, both of which seem informative.
A ratio you never see is the price of gold vs. the dollar index. Probably because the price of gold itself is thought to represent dollar strength (or weakness), so by dividing the price of gold by the dollar index, you'd appear to just be amplifying any up and down movements in the price of gold. Moreover, the natural ratio of gold nuggets to baskets of foreign currency in the earth's crust is, as of yet, unknown.
On the other hand, gold is far from a perfect proxy for dollar strength. For example, lately, the dollar has been rallying vs. other currencies, but gold has been holding its own. If someone were to tell you that gold will soon be at $2000, but the dollar index will be back at 100 (e.g. because of a Euro collapse), then holding dollars and holding gold would be equally profitable (+33%). So, the decision to trade in your federal reserve notes for gold should be based (to some extent) on the ratio between the predicted performance of the two.
Well, look no further. Let's start with silver, because it makes for a more compelling long term chart. One way I've begun to read charts is by first drawing a regression line to fit long-term data, and then creating new lines with the same slope to look for significant-appearing boundary points. That approach seems less subjective to me, for if we draw channels and trend lines based solely on local maxima and minima, we may be over-valuing outliers. Moreover, if you believe that the PM markets are pervasively manipulated, as I do (to quote Jim Rickards: "they don't consider it manipulation, they consider it their job"), then a regression line will capture overall market trends in a way robust to short-term hijinx.
Using this approach with silver, we appear to be at an important crossroads. On the 8 year chart below, we see that the $SILVER:$USD ratio bounced off the blue line twice before breaking support in 2008; it then took 2+ years to get back to the blue line, wherein it became resistance (Nov, Dec, & Jan 2011). The ratio then finally cracked through in February of this year, and bounced off once (during the May massacre). Now, it's right about there again. I'm currently triple long dollars (UUPT) and double long gold (DGP). If we break through the blue line, I'd say it's time to sell silver and gold, and buy dollars. And vice versa, if the blue line proves again to be support.
The $GOLD:$USD ratio is at a similar crossroads. Unlike silver, this ratio doesn't exhibit any steady long term trend. However, the three-year chart is an obvious rising wedge, cleared in April. The top line has been support once (May massacre), and it's back there again. Note I have included Bollinger bands instead of standard envelopes to account for the increased volatility owing to covariation of gold and dollar strength (15 day, 2 sigma parameters capture all the points quite nicely). Note that we are also right at the lower Bollinger band, which in the past has been a bullish sign for gold.
So, let's see what happens over the next few days.
*I feel compelled to inform our readers globally (as Eric "Leading the Witness" King might say) that my market musings are merely those of a dude thinking out loud, who's basically waiting for online poker to become legal again so he can return to his preferred method of gambling. In that spirit, please draw your own conclusions, and thanks in advance for sharing them with me.
It's been a month since I posted a chart showing the 10 yr treasury yield measured in ounces of silver. To summarize: a steady, decade-long downward trend (black trend channel) became notably sharper in 2010 (purple trend channel).
The 144-day moving average of gold, as discussed in the comments of an earlier post, appears to be significant: it's been the lower bound for the price of gold since early 2009. Incidentally, contrary to what I thought, the number 144 isn't quite random - it's a Fibonacci number.
I sure ain't one of them hi-falutin tradin fellers y'all should look to for advice, but this here looks like one of them fancy pennants I've heard so much about.
“Trinity B” has become rather infamous of late, posting prescient calls on a number of websites, whilst talking down some rather sacred cows in the PM community such as hyperinflation, silver shortages, and so on. She was discussed in the same breath as WB (may peace be upon her) by some, and flamed as a troll by others.
Earlier this week, Louis said we would publish some articles regarding the wisdom of taking investment advice from anonymous sources. What is the motivation of every person posting a story, opinion, stock tip, etc., etc.? Our stated goals at the Screwtape Files are to examine all the available evidence, assess it, and draw rational conclusions based on it. “Trinity B” was articulate, semi-plausible, and seemingly keen to promote a message. Most importantly, she was gathering attention in the PM community. We made contact, and we probed. We even managed to persuade Trinity to write a test article for publication so that we could assess the merits of her story.
This article, which we have decided not to share for various reasons of legality and personal confidence, essentially sought to explain the origins of WB and certain other silver price optimists. It was well written, credible, and compelling. It was also pure invention, as Trinity has herself now admitted to us. As Louis and other astute commentators here suspected, her calls were lucky guesses, based on charts. Trinity herself decided to stop the process before it became too serious. She wrote a sincere and heartfelt apology to us and – too embarrassed to post herself – has asked us to convey her regrets to her followers. She will not be posting again, nor replying to anyone who talks about her on blogs.
So, another myth is dispelled. We live in an age when blogs are a (non-silver) dime a dozen, and commentators are even more so. Is it right to listen to all points of view? Yes. Is it right to consider the possibility that insiders might want to leak information? Absolutely. But the more a point of view confirms our own ideas and hopes, the more strictly should we engage our skepticism.
