Screwtape Files: February 2013

GM's blackest algorithmic code

Inspired by the poetic stylings of W.B. Cypher to make a buck before mere anarchy is loosed upon the world, I was looking at some of the daily London Fix data. I noted that the minimum gold price in a given month has been a linear function of its monthly maximum and median price, with min = a + b*sqrt(max)*median^2 fitting damn well.

You see where I'm going here? As soon as a month is half-finished, we know what the lowest possible median can be ($1628.60 this month), and we know what the lowest possible maximum can be ($1674.25 this month), so we should be able to predict a floor to the monthly price with great accuracy and precision.

Come away, human investor

to the market

Come away, human investor

to the market and the wild

With a broker, hand in hand

for the markets more full of weeping than you can understand

Where pulses the Wall St

There lies a concrete island

where Corzines lay in wait

The drowsy market rats;

there we've hid our broker vats

Full of ETF's

and of blackest algorithmic code

I'm not even going to post any regular charts this week, because I'm tired of reading about COT reports and gold and silver bottoming. A relief rally is likely, perhaps a strong close to February, but I'm so confident a new low will be made within the next month or two, that I'm gonna take some time off until then, posting only a special kind of chart.

(1) Increase the price of gold (i.e. devalue the dollar against gold to reduce the US debt burden and help exports)
(2) Decrease the VIX volatility index (i.e. manage perceptions to keep people calm, distracted, and willing to borrow and spend)

There's a little known index that measures how well the Fed is doing its job. It's called the Dow Jones Industrial average.

The chart above shows two exponential moving averages since the March 2009 market bottom: one is a 10-day EMA of the Dow, the other is a 20-day of EMA of GLD/$VIX. Can you tell which is which?

Either the gold bull market is over or it's not. If it's not, then gold will hit $2000. But when? I decided to use actual numerical data (monthly prices) instead of drawing lines on a goddamn chart.

Can we estimate a parameter that captures the price action for the entirety of the bull market thus far? That's 12+ years of data points, so assuming the bull market isn't over (and again, everything that follows here rests on that assumption), extrapolation becomes a decently safe bet.

Turns out the monthly closing price of gold since 2001 has increased at a remarkably steady rate. The data points somewhat surprisingly satisfy the main assumptions of a (log) linear regression model (which can be checked by various diagnostic measures that I won't get into). The one violation is that prices constitute a time series, so the *signs* of month-to-month differences will be correlated, but there are fairly dependable ways to correct for that when they're not too glaring.

How well does the model perform? The 99% confidence interval for the expected monthly change is remarkably tight: between +1.042% and +1.050%. The 99% confidence interval for each month's price is depicted as a capped error bar (grey). At the center of each of those error bars you can imagine the best point-estimate for price that month. The yellow band covers the 99% confidence interval for what that best estimate is, each month. It's fairly wide, mainly because I used a more conservative calculation of standard deviation that takes into account that we're dealing with a time-series, and prices are correlated.

The green dotted line depicts when gold is expected to close a month at $2000 (June 2013); the blue dotted line depicts the most conservative estimate for when price is expected to close a month at $2000 (November 2013); and the purple dotted line depicts when the lower bound of the 99% confidence interval passes $2000 (August 2014). Note that the upper bound of the month-to-month confidence intervals passed $2000 only in May 2012.

Hey, look, what do I know? I'm just an idiot with a Mac G5-based 1100-node supercomputing cluster that runs off of 324 dual-quad core 2.8GHz Xeon processors and offers me a sustained performance of just over 12 teraflops. But though I'm looking to take an aggressive long position in gold and (eventually) silver, now is not the time. Especially if you're considering calls. I've sold the last of my puts, mind you -- I wouldn't bet on too much more downside (see above chart), and a relief rally may start next week -- but I'm confident a new low will be made in the next month.

The Commodities Channel Index (not to be confused with the Continuous Commodity Index, which measures the price of a basket of commodities and which I follow) is an indicator that looks at how the current price differs from its average price over X days (I set it to 50). It's based on average absolute deviation units, so it's interpretable over time. Anyway, if you'll look at the chart below, whenever it dips violently, there's always a second shoe to fall. Interestingly, the last time I busted this chart out (last spring) when the index was at its lowest point in decades (note: quickly approaching that level now), that was the only time in over a decade that gold hit the green line but didn't go on to make a new low, but even then price soon dipped violently again before moving sideways for the next few months, giving options buyers plenty of time. I'm posting two versions, the first over a shorter time frame so the resolution is better.

But, as Solon once said about Croesus, count no man happy until his stint as Fed Chairman is over.

As it stands now though, let's give credit where credit is due, and not let our favorite macroeconomic dogma blind us to what's been going on -- essentially since the double-tap commodities crashes of May and September 2011. Interest rates are low and the stock market is high - and not only in worthless fiat, but in terms of commodities. On a daily closing basis, the CRB Index hasn't been so cheap in terms of S&P500 shares since 2001!

On a high-low basis, there's an inch of slack:

What about the ratio with the $CCI index, which is basically the $CRB without the oil? It just closed today at its lowest point since January 2008.

Hello friends -
I haven't been trading much, partly because I've been busy with other stuff, and partly because I'm convinced gold and silver (as you'll see below) are going to break up or down by the end of this month and I'm waiting for a signal. (I want nothing to do with the palpably fraudulent stock market; it will grind higher until it or the bond market collapses in a major way.) But though I'll be keeping an eye out for trading opportunities, my guess is that the first half of 2013 will be a snoozer, playing out much like the first half of 2010, with stocks peaking in the spring, and gold holding its own, surviving periodic beat downs, and not making headlines. My guess is that $2000 will be challenged this fall.

Short term, silver looks ok, definitely better than gold. Let's see if it can bust out of the wedge on the weekly (log) chart:

Silver, linear daily; note the purple band has crossed $30.

I have been following the 34-week and 55-week moving averages for a long time now. Note that throughout silver's secular bull market, the 34-week MA (pink) has generally remained above the 55-week (green). The pink crossed the green in July 2003, marking the beginning of silver's long-awaited ascent over $5. It has fallen below only twice since: Oct 2008, then in Jan 2012. Well, unless silver gets smashed, pink will cross green in the next 2 weeks (it will happen this week if silver is up). If it happens, I'd weigh it pretty heavily with respect to gauging when silver's correction will end.

The last few weeks have been busy*, but I had the chance to look at some of the 'big silver deposit' story for SLV, which had no shortage of commentators. For those who don't know about my database project, we are in the process of building data structures for data mining on the ETF serial number data. Because I study the data, I'm entitled to add my comment to the 'sphere.

Normally I start an article with a premise ... expecting this, testing that ... but today I'll come out with it - I'm disenfranchised with the 'silver shortage' people because nearly everything I look at with the data points the other way. Don't get me wrong - we have only begun to scratch the surface of what is possible with debunking, debate and analysis, and 'time will prove all things', but increasingly the popularized silver stories (particularly of the 2010-2011 vintage) all appear as solid as warm pig swill.